Last night, President Barack Obama signed into law H.R. 8, the American Taxpayer Relief Act of 2012, which embodies a last minute, negotiated agreement reached with Congress to prevent a full dive off the fiscal cliff. H.R. 8 prevents major year-end tax hikes coupled with massive spending cuts by making permanent many existing tax programs and delaying the spending cuts. While the agreement avoids the first fiscal cliff, outstanding budget issues will require lawmakers to take action within two months on what is being called the next fiscal cliff: raising the nation’s debt ceiling.
ELEMENTS OF THE FISCAL CLIFF DEAL
The bill permanently extends the Bush-era tax rates for all individuals with income of less than $400,000 and joint filers with incomes below $450,000. The top tax rate on ordinary income above those levels will increase to 39.6 percent from 35 percent. In addition, the tax rate on capital gains and dividend income will increase to 20 percent for taxpayers with total income in excess of those levels. The compromise also includes an extenders package that is almost identical to the package approved by the Senate Finance Committee in August with one major addition: an extension of 50 percent bonus depreciation for property placed in service through December 31, 2013. The package also includes a two-year extension of the tax credit for research and development and extension of a dozen energy tax provisions through the end of 2013. The Congressional Budget Office (CBO) scored the agreement as increasing the federal budget deficit by $3.97 trillion over the next ten years. At the same time, others in the Administration and Congress say it increases tax revenue by $620 billion over ten years by raising taxes on the wealthy. These two seemingly different estimates are like comparing apples to oranges. The CBO estimate is based on government accounting practices that assume higher revenues to the federal government after 2012, when the Bush-era tax cuts were scheduled to expire. The $620 billion amount is based on a lower revenue forecast that assumes all of the Bush-era tax cuts were permanent.
The compromise will also delay the "sequester," which will impose steep, across-the-board cuts to domestic and defense programs, for two months; extend emergency unemployment benefits for a year; extend the Medicare "doc fix" for one year; provide a nine-month farm bill extension; and freeze congressional pay for one year.
Although the legislation will avert many of the year-end tax hikes and spending cuts that were set to kick in, it failed to address some of the major issues that have divided Congress in recent months. The package did not include an agreement to raise the debt ceiling, even though the nation reached its borrowing limit on Monday, December 31, 2012, and the Treasury Department has said it will use “extraordinary measures” to avert default as long as it can—likely into late February or early March 2013. A temporary, 2-percentage-point reduction in the payroll tax expired at midnight on December 31, 2012, and was not renewed as part of the agreement. In the end, the Congress and the President also did not address the country’s long-term fiscal issues in this bill – namely, a complicated tax code and rising entitlement spending.
TWELVE ENERGY TAX PROVISIONS EXTENDED
As mentioned earlier, the compromise includes an extension of twelve expiring energy tax provisions through December 31, 2013. The production tax credits for wind, biomass, geothermal, municipal solid waste, landfill gas, marine and kinetic energy, and certain hydropower facilities are included in the extenders package with the major modification that was made in the Senate Finance Committee package: it effectively extends the credit beyond one year by changing the new expiration date to a “commenced construction” deadline rather than a “placed in service” deadline. The package of energy tax extenders includes:
1. Extension and modification of credits for renewable energy:
a. Modify expiration date for renewable electricity production credit to
construction beginning before January 1, 2014
b. Exclude segregated paper which is commonly recycled from the definition
of municipal solid waste for purposes of the section 45 credit for
renewable electricity production
c. Election to claim the energy credit in lieu of the electricity production credit
2. Alternative fuel vehicle refueling property (non-hydrogen refueling property)
3. Expand section 30D credit for qualified plug-in electric drive motor vehicles to
include electric motorcycles
4. Credit for production of cellulosic biofuel with a maximum credit of $1.01 per gallon
and inclusion of fuel from algae
5. Extension of credits for biodiesel and renewable diesel:
a. Income tax credits for biodiesel fuel, biodiesel used to produce a qualified
mixture, and small agri-biodiesel producers
b. Income tax credits for renewable diesel fuel and renewable diesel used to
produce a qualified mixture
c. Excise tax credits and outlay payments for biodiesel fuel mixtures
d. Excise tax credits and outlay payments for renewable diesel fuel mixtures
6. Excise tax credits and outlay payments for alternative fuel, and excise tax credits for
alternative fuel mixtures (other than liquefied hydrogen)
7. Special depreciation allowance for cellulosic biofuel plant property and inclusion of
algae-based fuel plant property
8. Special rule for sales or dispositions to implement Federal Energy Regulatory
Commission (FERC) or State electric restructuring policy
9. Credit for production of Indian coal
10. Extension and modification of section 25C nonbusiness energy property
11. Credit for construction of energy-efficient new homes
12. Credit for energy-efficient appliances
A LOOK AHEAD
- The 113th Congress begins today, January 3rd, during which time Senate and House members will be sworn in. House Democratic and Republican caucuses are also expected to ratify party leadership and committee leadership.
- President Obama will be sworn in to his second term on Sunday, January 20th, with the public ceremony taking place the next day on Monday, January 21st.
- The President will give his State of the Union address to Congress on January 29th.
- Despite action taken to avoid the fiscal cliff, the nation is still expected to reach its authorized debt ceiling in February or early March. The delay of $109 billion in sequestration cuts to discretionary spending (evenly split between defense and non-defense federal spending) will expire March 1st. The federal government is funded through March 27th by a continuing resolution enacted last Fall.
- While the President is obligated to present his fiscal year 2014 budget by the first Monday in February (February 4th), we expect a delay in its release due to the fiscal cliff negotiations.
- Congressional action for the next two months will be consumed by the battle over the debt ceiling and reducing both discretionary and entitlement spending. As they did in 2011, Republican lawmakers are expected to insist on a package that includes a dollar of cuts in government programs for each dollar increase in the debt ceiling.
- The next big fiscal issue to be addressed is tax reform. While the fiscal cliff package did not include a timetable for enacting tax reform, the compromise left the door open for comprehensive tax reform by not repealing any of the tax expenditures (or “loopholes”) that are expected to be used to offset a reduction in both corporate and individual income tax rates.
In February 2012, Van Ness Feldman expanded its capabilities by combining practices with the Seattle law firm of GordonDerr LLP, a preeminent real estate, land use, water law, and civil litigation firm in the Pacific Northwest. Learn more at www.vnf.com