Congress Avoids Fiscal Cliff, Postpones Sequestration Fix

As 2012 drew to a close, Congress scrambled to address the nation’s long-approaching fiscal challenges that lawmakers had thus far not resolved. In order to avoid taking the economy off a “fiscal cliff,” Congress needed to address several issues including sequestering discretionary funds in 2013, allowing the Bush-era tax cuts expire in 2012 and the expiration of other tax-related provisions and benefits. The term fiscal cliff encapsulates the potential economic decline the nation would have faced if these challenges were all left unresolved by the 112th Congress.

Instead of addressing all of the fiscal challenges at hand, Congress decided only the tax- and benefit-related issues, while deferring a decision on how to avert the sequester by postponing the date of its implementation from January 2 to March 1.

The Budget Control Act of 2011 (BCA) required the sequestration of discretionary funds for 10 years starting on January 2, which means making across-the-board cuts to achieve a $1.2 trillion reduction in the deficit over a 10-year period (see Memo, 12/14/12). HUD and USDA would have had to cut affordable housing programs by 8.2% to comply with the cuts required by the BCA.

As the date the Administration would have been required to implement the sequester grew closer, numerous Republican and Democratic Members of Congress expressed agreement that the sequester was a blunt instrument for addressing spending reductions and should be replaced with another cost-saving mechanism.

Lawmakers and President Obama spent the majority of December negotiating a deal to replace the sequester and address the other fiscal issues with no success. In late November, the President produced an alternative two-part fiscal plan that would close the remaining $3 trillion deficit gap addressed by the BCA, avert sequestration and address end-of-year tax extensions (see Memo, 12/7/12).

House Republicans released a counter-proposal to address the fiscal cliff that included several hundred billion dollars in additional cuts to discretionary funding. These cuts could have resulted in reductions to non-defense discretionary programs that would be deeper than those imposed by sequestration, according to the Center on Budget and Policy Priorities (CBPP) (see Memo, 12/7/12).

The President met with House Speaker John Boehner (R-OH) numerous times in early December and, by mid-month, agreement between the two parties seemed imminent. However, Speaker Boehner lacked consensus among members of the Republican caucus and was unable to gain support for an alternative fiscal plan in the House. The House and Senate resumed session after a Christmas recess and both chambers met through the last day of 2012, when a bipartisan agreement to avert the fiscal cliff was struck in the Senate.

In the early hours of January 1, the Senate passed H.R. 8, The American Taxpayer Relief Act of 2012, a bill that partially addresses the end-of-year fiscal challenges. The bill passed by a vote of 89 to 8 with three Democrats and five Republicans dissenting. The House then passed this same bill in the late hours of January 1 by a vote of 257-167, with the majority of Republicans voting against it and the majority of Democrats voting in favor of it. The President is expected to sign the bill into law.

H.R. 8 achieves some of the Administration’s and Democratic lawmakers’ goals but does not address the deep spending cuts scheduled for discretionary programs.

The bill extends unemployment insurance and refundable tax credits, raises income tax rates for individuals earning more than $400,000 and households earning more than $450,000, limits certain exemptions and deductions, increases the estate tax rate and capital gains and dividends taxes and provides a permanent fix to the Alternate Minimum Tax and a one-year fix to the Medicare Sustainable Growth Rate. The bill includes significantly less revenue than the Administration and Democratic lawmakers had said was critical to include in an end-of-year agreement, putting off the battle for revenue until Congress debates the replacing of the sequester’s across-the-board spending cuts.

The bill also includes language that would give more time for Low Income Housing Tax Credit (LIHTC) projects to take advantage of a minimum credit rate of 9% provided by the Housing and Economic Recovery Act of 2008. That act provided a 9% credit floor for projects placed in service before the end of 2013. The new language in H.R. 8 would provide the minimum 9% credit to projects allocated tax credits before the end of this year, but not necessarily placed in service.

The bill postpones implementation of the sequester until March 1, giving Congress two additional months to agree on an alternative spending reduction method. The cost of postponing the sequester is paid for by revenue from Individual Retirement Account transfers and from additional spending cuts, 50% of which are from security spending. In February and March, Congress would also need to address the debt ceiling and the expiration of the six-month continuing resolution (CR) providing funding in lieu of finalized FY13 appropriations bills.

H.R. 8 lowers the caps for discretionary spending in FY13 by $2 billion, which would alter the trajectory of HUD and USDA appropriations for the current fiscal year. The CR, which provides only FY12 funding levels, provides $5 billion less than the BCA’s FY13 spending cap. However, several programs, including the Housing Choice Voucher Program and the Public Housing Operating Fund, would be greatly impacted if FY13 funding levels were not increased over FY12 levels. To continue serving all current residents, Section 8 voucher funding would need to be increased to account for inflation. In order to maintain quality operation of public housing units, a significant increase would be needed for FY13; in FY12, the Public Housing Operating Fund was cut when HUD required one-time contributions of reserves from public housing agencies (PHAs) to supplement the lower appropriation. With PHA reserves diminished after the FY12 contribution, the FY13 appropriation would need to provide full operating funding in order to support all current residents.

Members of the House and Senate Appropriations Subcommittees on Transportation, Housing and Urban Development, and Related Agencies (THUD) had anticipated that a final FY13 THUD bill might significantly increase several HUD programs underfunded in the House bill or the Senate Committee on Appropriations-passed bill. This now may not be possible with an FY13 spending cap lower than that required by the BCA.

Click here to view H.R.8 as passed by the Senate.

Click here to view the CBO score of H.R. 8 as passed by the Senate.