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Still a Chance for a Fiscal Cliff Deal
Charles Schwab
By Michael Townsend
December 24, 2012


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Key points

  • House Speaker John Boehner's "Plan B," which would have extended Bush-era tax cuts for all taxpayers earning less than $1 million per year, failed to garner sufficient Republican support and wasn't introduced for a vote in the House of Representatives.
  • The House is in recess and the Senate will recess until next Thursday, so significant developments aren't likely until at least December 27.
  • A Democratic compromise proposal could pass the House if it gets near-unanimous Democratic support and support from as few as 30–40 Republicans, and would likely pass the Senate as well.
  • The timing is tight, but we believe there's still time to reach an agreement by New Year's Eve.

Last night, Speaker of the House John Boehner (R-OH) pulled the plug on the so-called "Plan B" to avoid most of the tax increases associated with the fiscal cliff, refusing to allow the bill to come to a vote when it became clear that it would not achieve a majority. Plan B would have extended the Bush-era tax cuts for all taxpayers earning less than $1 million per year.


In the short term, we expect no significant developments until at least December 27. The House is in recess and has set no definite date for returning, but members of Congress have been told to expect to return to Washington late next week. The Senate is finishing up non-fiscal cliff business this afternoon and then will recess until next Thursday. President Obama and Speaker Boehner may talk in the next few days, but no legislative action can take place before late next week at the earliest.


One possible path to resolving the fiscal cliff is that President Obama strikes a deal with Speaker Boehner and Senate Majority Leader Harry Reid (D-NV) on a compromise that looks a lot like the one that the White House put on the table earlier this week. According to various news sources, the proposal included:

  • Extending the current tax rates for everyone earning less than $400,000 per year
  • A top capital gains and dividends tax rate of 20%
  • A top estate-tax rate of 45% with an exemption level of $3.5 million
  • Capping itemized deductions at 28%, while allowing a 35% deduction for charitable contributions
  • A permanent "fix" to the Alternative Minimum Tax (AMT)
  • Roughly $1.2 trillion in spending cuts and savings over the next ten years


Such a deal could pass the House with the support of all or virtually all Democrats and as few as 30-40 Republicans, and it would likely pass the Senate. It could have consequences for Speaker Boehner, who could be challenged for his position in the next Congress if he puts a bill on the floor that garners only a handful of Republican votes.


Still up in the air is whether any end-of-year agreement would include an increase in the debt ceiling. The country is bumping up against the current limit of $16.4 trillion, and the Treasury Department has indicated that the ceiling will have to be raised by sometime in mid-February to avoid default. President Obama would like to have a short-term increase included in any fiscal cliff agreement, but Republicans would prefer to have a separate discussion about that in early 2013.


Timing is obviously very tight. But there is still time to reach an agreement, in our view. If a compromise can be reached by Thursday or even Friday of next week, the legislative process in both chambers could still be completed by Monday, December 31.

 

 

Important Disclosures
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
All expressions of opinion are subject to change without notice in reaction to shifting market or economic conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.
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