Congress Passes Cliff Deal

By JANET HOOK, COREY BOLES and SIOBHAN HUGHES

Congress broke a rancorous stalemate Tuesday to pass legislation designed to avert the so-called fiscal cliff. But the compromise bill, which blocked most impending tax increases and postponed spending cuts largely by raising taxes on upper-income Americans, left a host of issues unresolved and guaranteed continued budget clashes between the parties.

The fiscal cliff deal leaves a host of issues unresolved, most glaring of which is the need for the U.S. to increase it's borrowing limit. WSJ Washington Bureau Chief Jerry Seib reports on Lunch Break. Photo: AP.

WSJ Washington Bureau Chief Jerry Seib joins Lunch Break with insights into the back-room negotiations that led to a last-minute deal to avert the fiscal cliff.

President Barack Obama said he would sign the bill sent to him by Congress to avert the U.S. fiscal cliff. Watch Obama's full statement, in which he praises the late-night deal. Photo: Getty Images.

U.S. stocks vaulted higher on the first day of the new year, joining a global equity rally after Congress's last-minute agreement on the deficit. The Dow Jones Industrial Average shot up 235 points, or 1.9%, for a second consecutive day of triple-digit gains.

The bill represented the largest tax increase in the past two decades and was passed over opposition from conservative Republicans in the House who objected to the fact that it contained no long-term spending cuts of any significance.

The House voted 257-167, with 172 Democrats joining 85 Republicans in supporting the measure. Voting against the bill were 151 Republicans, and the GOP leadership split over the issue: House Majority Leader Eric Cantor (R., Va.) voted against it, while House Speaker John Boehner (R., Ohio) voted for it. Also supporting the bill was Rep. Paul Ryan (R., Wis.) the GOP vice presidential nominee who has been an ardent opponent of increasing taxes.

President Barack Obama appeared in the White House press briefing room minutes after the House passed the bill. With Vice President Joe Biden standing behind his right shoulder, he said: "Thanks to the votes of Democrats and Republicans in Congress I will sign a law that raises taxes on the wealthiest 2% of Americans while preventing a middle-class tax hike that could have sent the economy back into recession and obviously had a severe impact on families all across America." Mr. Obama said he would like to take additional steps to reduce the nation's deficit.

Once the president signs the bill, it will end a tortured drive by Congress to avert the fiscal cliff, the deadline for which was technically breached on Jan. 1.

The far-reaching agreement will have lasting implications for the tax code, future budget battles and the balance of power in Washington. It raises income-tax rates for the first time in almost two decades and fulfills Mr. Obama's signature campaign promise to prevent rates from rising on the middle class. Not since 1991 has a Republican in Congress supported such a move—a challenge to its brand as the antitax party.

In policy terms, it permanently codifies most of the tax rates that were set only temporarily in the Bush era. After years of failed efforts, the bill permanently keeps the middle class from being hit by the alternative minimum tax, a 1960s edifice intended only for America's wealthiest.

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Speaker of the House John Boehner, right, walks with House Majority Leader Rep. Eric Cantor to a meeting with House Republicans on the fiscal cliff budget deal on Capitol Hill in Washington on Jan. 1.

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House Speaker John Boehner emerges from a meeting with House Republicans at the U.S. Capitol on Tuesday.

At the same time, the bill defers some of America's toughest spending problems—in particular the ballooning cost of health care—and it doesn't come close to the kind of $4 trillion deficit-reduction deal the country's leaders had hoped to negotiate. By some estimates, it would cut the deficit by $600 billion over 10 years.

"The bill before us is not the Grand Bargain," said Rep. David Dreier (R., Calif.) as the House opened debate. "But we are working hard to pull ourselves back from the cliff."

The compromise dodges one cliff, but it sends Congress barreling toward another. In two months, the delayed $110 billion in spending cuts will again kick in. At the same time, the U.S. will face the need to increase its borrowing limit, a change that can only be made by Congress. That sets up another rancorous fight, one with potentially more damaging consequences. Republicans want to use the debt ceiling to extract spending cuts. Mr. Obama has said he won't negotiate.

The failure to grapple with the biggest budget questions disappointed business leaders who had hoped for a comprehensive budget agreement that could tackle the deficit and diminish what for some has been a debilitating policy uncertainty.

The deal, hashed out in a New Year's compromise between Senate Minority Leader Mitch McConnell (R., Ky.) and Vice President Biden, is a something-for-everyone mélange. It includes low investment-tax rates sought by Republicans and an extension of tax credits for the working poor that are Democratic priorities.

It also became a last-minute vehicle for all manner of year-end miscellany. It included a stopgap extension of farm programs that averts a spike in milk prices, and it blocked a congressional pay raise that could have provoked the wrath of voters who view Congress with disdain for its chronic brinkmanship and failure to solve major problems.

The protracted debate over the fiscal cliff was a classic example of what has inspired the public's ire. Both parties had for months said they didn't want New Year's 2013 to hit without action to block the across-the-board tax rate increases and $110 billion in defense and domestic-program spending cuts collectively known as the fiscal cliff.

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"This legislation is far from perfect, and the process that led us here was a disgrace," said Rep. Louise Slaughter (D., N.Y.).

At the heart of the deal are some of the biggest tax changes in years, including an increase in tax rates for couples with incomes over $450,000, to 39.6%. For those same households, capital-gains and dividend taxes would increase to 20%, from 15%. Estate taxes would increase from 35% to 40%.

More than three-quarters of American households would see a tax increase from their 2012 tax levels, according to an analysis by the Tax Policy Center, a joint venture of the Brookings Institution and the Urban Institute. For households earning between $500,000 and $1 million, the additional tax owed would be about $15,000. For households with incomes over $1 million, it would average about $170,000.

Despite passing the Senate by an overwhelming 89-8 vote early Tuesday morning, the bill only got out of the House after a tumultuous day in which conservatives and liberals both railed against the bill. Mr. Cantor and other House Republicans objected to it, arguing that it consisted almost entirely of tax increases.

Both the U.S. Senate and House of Representatives approved a bipartisan deal to block most impending tax increases and postpone spending cuts. The WSJ's Mark Cranfield explains what the deal means for the U.S. deficit.

The U.S. Congressional compromise illustrates difficulties modern democracies face in producing fiscal-policy solutions, especially when central banks are keeping monetary policy so easy. Dow Jones' s David Cottle looks at the problem. Photo: Getty Images

The conservative rebellion posed a major test of leadership for Speaker Boehner, just two days before he is to stand for re-election as speaker. His solution was to present balking GOP lawmakers with two options: amend the Senate bill to include spending cuts, which would likely kill the deal entirely, or simply put the Senate bill to a vote.

Senate Democratic leaders made clear that, if the House amended the bill, they would not consider the bill. Senate Majority Whip Dick Durbin (D., Ill.) said he was stunned by Mr. Boehner's initial reluctance to put the compromise to a vote. It was supported by nearly all Senate Republicans, including some of the most conservative members, such as Sens. Tom Coburn of Oklahoma and Pat Toomey of Pennsylvania.

"That's just madness,'' said Mr. Durbin. "We had a strong vote in the Senate. How much stronger can we make it?''

Mr. Boehner warned his colleagues that making changes risked killing the bill and exposing the GOP to blame for tax increases, spending cuts and possible turmoil in the economy. After canvassing members, Republican leaders decided there wasn't enough support to revise the bill and prolong the battle.

House Democrats supported the bill in significant numbers after a closed-door session with Mr. Biden, who came to the Capitol twice in 24 hours to sell the package. Mr. Biden's major mission was to calm liberals who groused that Mr. Obama gave too much ground.

Rep. Henry Waxman (D., Calif.) said earlier in the day that "the president gave up a lot—more than I would have liked—but I can understand that we're dealing with the product as it is, and I'll probably vote for it."

Many House Democrats expressed the same anguish Senators had Monday: Although most had significant reservations about the compromise, they weighed them against the potentially calamitous results of allowing the tax increases and spending cuts to remain in effect, especially with markets reopening Wednesday.

It was, said Rep. Gerry Connolly (D., Va.), a "hold-your-nose vote."

Corrections & Amplifications
Republicans wanted automatic spending cuts of $24 billion, known as the sequester, to be replaced with cuts in other areas and not simply be canceled. An earlier version of this article incorrectly said $24 million.

Write to Corey Boles at corey.boles@dowjones.com, Janet Hook at janet.hook@wsj.com and Siobhan Hughes at siobhan.hughes@dowjones.com

A version of this article appeared January 2, 2013, on page A1 in the U.S. edition of The Wall Street Journal, with the headline: Congress Passes Cliff Deal.