Fiscal Cliff Bill Passes the House; Cities Still At Risk

January 2, 2013

By Carolyn Coleman

Following a tense day of deliberations by the House Republicans, the House passed The American Tax Relief Act of 2012 aimed at averting the fiscal cliff of automatic tax hikes and spending cuts that threatened to throw the economy back into a recession. The House vote came after the Senate cleared the measure at 2:00 a.m. on New Year's Day and clears the way for the bill to be sent to President Obama who said he would sign it. Vice President Joe Biden and Republican Senate Minority Leader Mitch McConnell hammered out the agreement after weeks of negotiations by others failed.

Among other items, the measure protects the Bush-era tax rates for individuals and families earning less than $400,000, extends jobless benefits for two million Americans looking for a job and delays for two months automatic spending cuts to domestic and defense programs that were set to go into effect on January 2, 2013. [For a summary of the legislation, click here.]

In a rare appearance of bipartisanship, the Senate passed the measure overwhelmingly by a vote of 89 - 8 with three Democrats and five Republicans voting against the bill. The House passed the measure by a vote of 257-167 with 85 Republicans and 172 Democrats supporting it.

In response to the votes, NLC President Marie Lopez Rogers said, "While today's agreement protects middle income families from tax increases and preserves benefits for two million unemployed Americans, which we fully support, we are disappointed that the automatic spending cuts to important federal programs that our cities and families rely upon continue to be an option to resolving the nation's fiscal challenges.

"Over the last several years," she continued, "these programs, which support infrastructure, job training, housing, and education investments, have already been subject to significant cuts in the name of deficit reduction. If the automatic spending cuts are implemented, they will set back the economic recovery we are only now beginning to see in our communities and will lead to more cuts in services to the families who need them the most."

Importantly for cities and towns, the bill does not call for any changes to the tax exemption for municipal bonds. NLC, city leaders and the state municipal leagues have been vigorously opposing any talk of limiting the exemption, which is essential to the ability of local governments to finance projects in their communities. However, that victory may only be temporary. Congressional and Administration representatives continue to signal that the exemption will be the subject of a tax code reform process that may get underway later this year.

The bill falls far short of being a grand bargain to reduce the federal deficit that many sought and reinforces the notion of an incremental approach to deficit reduction. In 2011, the agreement to raise the debt ceiling resulted in approximately $1 trillion in spending cuts and the sequestration mechanism to force additional cuts in discretionary federal spending. The Biden/McConnell fiscal cliff measure produces roughly $600 billion in "savings" in the second installment. The next could take shape in the next round of fiscal cliff negotiations that will get underway soon, which include the need to raise the nation's debt ceiling to avoid the risk of default on loan obligations; a stop gap spending measure to avoid a government shutdown after the current one expires on March 31; and the new March 1 deadline for averting the automatic spending cuts.

"As the debates over spending continue in the new year," said President Rogers, "we will continue to call upon federal lawmakers to use a balanced approach to deficit reduction and to preserve these essential federal investments that drive growth and job creation in our communities. We cannot and must not solve our country's fiscal problems on the backs of our communities and our families."