Jan. 1 (Bloomberg) -- The House of Representatives passed legislation averting income tax increases for most U.S. workers after Republicans abandoned their effort to attach spending cuts that would have been rejected by the Senate.
The 257-167 bipartisan vote breaks a yearlong impasse over how to head off $600 billion in tax increases and spending cuts that were set to begin taking effect today. The Senate passed the bill early this morning, 89-8, and it goes to President Barack Obama for his signature.
“This law is just one step in the broader effort to strengthen our economy,” Obama said at the White House. He said he hoped Congress this year would handle budget issues “with a little bit less drama, with a little less brinksmanship.”
The White House said Obama was leaving Washington afterward to resume his vacation in Hawaii.
The measure isn’t the grand bargain on deficit reduction lawmakers wanted when they created the tax-and-spending deadlines over the past three years. While it averts most of the immediate pain, it is only a small step toward controlling the federal deficit -- an issue that will return with a February fight over raising the $16.4 trillion debt limit.
The deal was worked out by Vice President Joe Biden and Senate Minority Leader Mitch McConnell, a Kentucky Republican. Eighty-five Republicans and 172 Democrats voted for the measure while 16 Democrats and 151 Republicans opposed it.
“I realize that some argue that compromise is a sign of weakness,” Rules Committee Chairman David Dreier, a California Republican, said during floor debate. “I hope that this bipartisan agreement can lay the foundation for continued work to address the tremendous challenges that we face as a nation.”
California Republican Darrell Issa said he opposed the bill because it contains “$4 trillion of new debt and deficit and there’s no pay-for.”
The plan will make the George W. Bush-era income tax cuts permanent for most workers while letting them expire for top earners.
“This legislation breaks the iron barrier that for far too long has prevented additional tax revenues from the very wealthiest,” said Michigan Democrat Sander Levin.
House Republicans had opposed higher tax rates for any income level, and a number of them objected today that the Senate bill didn’t cut spending enough.
The legislation will continue expanded unemployment benefits and delay automatic spending cuts for two months. It will let a 2 percent payroll tax cut expire.
The Senate vote early today shifted the pressure to House Speaker John Boehner of Ohio, who didn’t speak during debate on the bill. In his two years as speaker, Boehner has had to quell rebellions among fellow Republicans backed by the anti-tax Tea Party.
Boehner’s second-in-command, Majority Leader Eric Cantor of Virginia, voted against the measure. Budget Committee Chairman Paul Ryan of Wisconsin, this year’s Republican vice presidential nominee, voted for it “to protect as many Americans as possible from a tax increase,” he said in a statement.
The plan marks a rare bipartisan agreement for lawmakers who have been trying for more than two years to reach an accord on taxes and spending, hurtling from deadline to deadline. Even this least-common-denominator agreement required brinkmanship and came after weeks of partisan bickering.
Still, Republican Alan Simpson and Democrat Erskine Bowles, co-leaders of Obama’s 2010 deficit-reduction commission, said in a statement, “Washington missed this magic moment to do something big to reduce the deficit, reform our tax code and fix our entitlement programs.”
The budget deal will raise taxes on 77 percent of U.S. households, mostly because of the expiration of the payroll tax cut, said the nonpartisan Tax Policy Center in Washington.
The heaviest new burdens in 2013, compared with 2012, will fall on top earners who face higher rates on income, capital gains, dividends and estates. The top 1 percent of taxpayers, or those with incomes over $506,210, will pay an average of $73,633 more in taxes, the Tax Policy Center said.
Compared with continuing current policies, the legislation will increase taxes by $620 billion.
It will raise tax rates on income of individuals above $400,000 and married couples above $450,000. That’s double the individual threshold Obama campaigned on and 80 percent higher than his preferred level for married couples.
The top rates on capital gains and dividends will increase to 23.8 percent starting at the same income thresholds, including a 3.8 percent tax that starts today on top earners. Limits on personal exemptions and itemized deductions for top earners that had been phased out will return, for individuals starting at $250,000 and married couples starting at $300,000.
Estates will receive an exemption of more than $5 million and a 40 percent top rate, splitting the difference on rates between Republicans and Democrats. The exemption will be indexed for inflation. The alternative minimum tax will be permanently fixed to prevent it from expanding to more households.
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