By Lisa Mascaro, Kathleen Hennessey, Michael A. Memoli and John Fritze, Tribune Newspapers
2:38 AM EST, January 1, 2013
Hours before a midnight deadline Monday, the White House reached a tentative deal with Congress to stop an enormous tax hike for all but the wealthiest households and to postpone for two months tough decisions on how to cut federal spending.
After a rare holiday session that lasted through the New Year's Eve celebration and two hours into New Year's Day, the Senate voted, 89 to 8, to approve the proposal. Republican leaders in the House had balked at holding a vote in the dark of night, but are expected to bring the bill up later Tuesday.
The House, where GOP lawmakers have been resistant to voting for a tax increase, will now determine whether the nation's plunge off the fiscal cliff is halted. As long as Congress is seen to be working toward a solution, no dire economic fallout is expected from the delay.
The deal would represent a milestone for Republicans, whose anti-tax stance has defined the party since then-President George H.W. Bush in 1990 broke his promise not to raise taxes. Republicans have not supported an effort to increase income taxes since then.
It also would be a concession for Democrats who backed away from President Obama's popular campaign pledge that he would ask households earning more than $250,000 to pay more in taxes. Under the deal with Republicans, taxes will increase only on households earning more than $450,000.
The deep automatic spending cuts scheduled to begin Wednesday — the other part of the "fiscal cliff" — would be pushed back just long enough to ensure that the partisan budget battles marking Obama's first term will also punctuate the beginning of his second. Negotiations over the cuts were expected to be rolled into talks about extending the nation's debt ceiling, a prospect Democrats promised to resist.
For Maryland, the Senate proposal would, for now, avoid potentially harmful spending cuts known as sequestration, but it would require lawmakers to revisit the issue in a few months — prolonging the uncertainty federal contractors and government employees in the state have been dealing with all year.
Asked about the possibility of a two-month delay of sequestration — an idea that arose Monday — Sen. Ben Cardin said it would be better than facing the cuts right now, but that kicking the nation's fiscal problems off to the next Congress, which begins Thursday, is far from ideal.
"I'm disappointed," the Maryland Democrat said in an interview. "We've already been impacted by the potential for sequestration. … A two-month extension is better than hitting a wall — but it's still bad news."
The $110 billion in cuts called for would be particularly painful in Maryland, given its proximity to Washington. Maryland is home to nearly 300,000 federal workers. Social Security, the National Institutes of Health and the National Security Agency are among the many agencies based in the state.
Private government contractors in Maryland, meanwhile, were awarded about $27 billion in work last year — among the highest per capita in the nation.
Gov. Martin O'Malley said congressional delay is complicating his administration's decision-making as it heads into the 2013 session of the General Assembly next week.
"It certainly casts a much greater degree of uncertainty over our planning," said O'Malley, a Democrat.
If the budget issues are not quickly resolved, O'Malley said, the state may have to increase the amount of money it allocates to its Rainy Day Fund — raising it above the 5 percent of the state's budget that is recommended by bond rating agencies.
O'Malley, who blamed the difficulty in reaching a deal on congressional Republicans, said Maryland and its neighbors are especially vulnerable to the defense and domestic budget cuts that would come with sequestration.
"Our region — Maryland and Virginia and D.C. — certainly stand to suffer greater harm than other regions of the country because of the federal presence and federal installations of health and security," he said.
The normally festive time of year fell serious Monday as details of the deal emerged. Vice President Joe Biden, who brokered the deal in marathon sessions with Mitch McConnell, the Senate's Republican minority leader, was dispatched to the Capitol for an intense 90-minute session with Democrats.
Going off the so-called cliff may not be as disastrous as once envisioned, if lawmakers quickly pass legislation to fix it. And it could also have political benefits.
Pushing the votes to Tuesday accomplished a political back flip that would be particularly advantageous for anti-tax Republicans and has been discussed for months.
With the existing tax rates expiring at midnight Monday, Tuesday ushered in the new higher rates. If Congress acted Tuesday, the votes would be to lower tax rates on wealthier Americans, rather than raise them.
Rep. Steny H. Hoyer, the second-highest ranking Democrat in the House, noted that tax breaks and spending cuts could be dealt with retroactively once an agreement is struck. Washington has frequently done that in the past few years.
"Sequestration will be harmful to Maryland, but it will also be harmful to the country, which is why I think it's so important that we act," the Southern Maryland lawmaker said in an interview. "If we don't take care of sequestration in the next few hours, then there's no doubt that it will be a subject [dealt with] immediately" in the new year.
McConnell and Biden had been in close contact all day after having worked past midnight Sunday and then resumed again early Monday morning to craft the deal.
The minority leader convened Republican senators behind closed doors at dinner time, and many emerged optimistic that a deal was at hand.
"Hope springs eternal around here, even though it gets a little sticky at times," said Sen. Pat Roberts, a Kansas Republican. Boehner similarly convened his troops in a basement office beneath the Rotunda.
One result became increasingly clear: With many issues still unresolved, Washington was poised to continue the partisan budget battles that have defined Obama's first term well into this year.
Under the proposed deal, more than $660 billion in revenue would be raised — far less than the $1.6 trillion Obama first sought in new revenue when he still hoped for a large deficit-reduction package.
The agreement would set the top tax rates at 39.6 percent for income above $450,000 for households and $400,000 for individuals.
Tax rates on investment income would also rise for those higher-income households, from the historic low 15 percent rate on capital gains and dividends to 20 percent. The president had wanted to tax dividends at the same rate as ordinary income.
About 2 million out-of-work Americans would benefit, if the deal is approved, from a one-year extension of long-term unemployment benefits, which expired over the weekend.
One area that hewed closer to Democratic priorities was Obama's proposal to reinstate limits on how much upper-income households can benefit from personal exemption tax credits and itemized deductions. Those limits, in place before the George W. Bush-era tax cuts began in 2001, were done away with over the past decade.
The agreement under consideration would reduce those deductions for households earning more than $250,000. That would lead to higher effective taxes on those households without an increase in their tax rates, which Republicans had resisted.
Other tax credits established under Obama's economic recovery program would also be extended for five more years. That provision is a nod to Democratic calls for more stimulus spending to help the economy and for adjustments to the tax code to help those with more modest incomes.
Those credits include a $2,500 tax credit for college students and additional credits that allow cash refunds even if no tax is owed for those with children and family incomes below $45,000.
The deal also includes a permanent fix for the Alternative Minimum Tax, a part of the tax code that was established decades ago to ensure high-income earners pay at least a minimum amount of tax, rather than substantially eliminate their liability with extensive deductions. But it increasingly snares middle-class families because it was never indexed to inflation. Congress must fix the Alternative Minimum Tax issue every year, a problem that would be finally resolved with Monday's deal.
Even with these thorny tax issues all but settled, the mandatory budget cuts that would start to reduce federal spending Wednesday remained a sticking point until late Monday.
The sequestration cuts slice across defense and domestic programs and had been set as a last-ditch trigger designed to spur negotiations for a broader budget deal after an earlier deficit-reduction effort failed.
Talks focused on postponing the cuts for two months, but offsetting the $24 billion that would not be saved. The White House and Republicans eventually settled on a mix of revenue increases and spending cuts.
Postponing the automatic cuts for two months, as the Republicans wanted, all but ensures the budget battles will continue. Democrats had hoped to postpone that reckoning for a year to keep Obama's second term from beginning with a repeat of past tumultuous budget battles.
Baltimore Sun reporter Michael Dresser contributed to this article.
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