Washington’s last-minute scramble to step back from a “fiscal cliff” ran into trouble last night as Republicans in the House of Representatives balked at a deal to avert a budget crisis.
Republican leaders in the House said they might try to change the bill approved by the Senate which voted to raise taxes on the wealthy in a late-night show of unity.
That would set up a high-stakes game of chicken between the two chambers and risk a stinging rebuke from financial markets.
The bill drew overwhelming support from Republicans and Democrats alike in the Senate when it passed by 89 votes to eight. But majority leader Eric Cantor, the number two Republican in the House, told reporters that he does not support the measure.
Republicans said they might try to add more spending cuts to the bill, which contains over $600bn (€454bn) in tax increases but only around $12bn in spending cuts.
Republicans could face a backlash if they scuttle the deal. Income tax rates technically rose back to 1990s levels for all Americans at 12 midnight, and across-the-board spending cuts on defence and domestic programs are due to kick in today.
Economists say the $600bn combination of tax cuts and spending cuts could push the economy into recession, and public opinion polls show Republicans would shoulder the blame.
Lingering uncertainty over US fiscal policy has unnerved investors and depressed business activity for months. Financial markets have staved off a steep plunge on the assumption that Washington would ultimately avoid pushing the country into a recession.
With financial markets closed for New Year’s Day, legislators had yesterday to close the deal before Wall St has time to weigh in.
“My district cannot afford to wait a few days and have the stock market go down 300 points tomorrow if we don’t get together and do something,” Representative Steve Cohen, a Democrat from Tennessee, said.
The bill passed by the Democratic-led Senate would raise income taxes on families earning more than $450,000 per year.
Low temporary rates that have been in place for less affluent taxpayers for the past decade would be made permanent, along with a range of targeted tax breaks put in place in 2009.
However, workers would see up to $2,000 more taken out of their paychecks annually as a temporary payroll tax cut was set to expire.
The key points include:
*Postponing for two months the start of $1.2 trillion in automatic spending cuts over 10 years. For those two months, $24bn in savings would be substituted.
*Raise $600bn in revenue over 10 years through a series of tax increases on wealthier Americans.
*Permanently extend tax cuts made in 2001 by president George W Bush for income below $400,000 per individual, or $450,000 per family. Income above that level would be taxed at 39.6%, up from 35%.
*Caps personal exemptions and itemised deductions for income above $250,000, or $300,000 per household.
*Raises estate tax rate to 40% for estates of more than $10m per couple, up from the current level of 35%.
*Extends unemployment insurance benefits for one year for 2m people.
*Extends child tax credit, earned income tax credit, and tuition tax credit for five years.
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