The fiscal cliff compromise passed by the Senate in the early morning hours Tuesday would mute much but not all of the negative economic impact of going over the cliff.
Most prominently, it would extend the Bush-era tax cuts for the vast majority of Americans and spare tens of millions from the Alternative Minimum Tax.
But the deal, crafted over the long weekend by Vice President Joe Biden and Senate Minority Leader Mitch McConnell, still must be approved by the House.
And while it would provide some short-term certainty, it would leave a range of big issues unaddressed.
For instance, when and how will lawmakers raise the country’s debt ceiling? From all indications, the coming fight in February could be ugly.
The legislation also creates a new cliff deadline over spending cuts around the same time the debt ceiling will need to be raised.
And what about real tax and entitlement reform? Both are key to long-term deficit reduction, but neither are included in the compromise proposal.
Instead, according to sources familiar with the deal and the text of the bill, the Biden-McConnell compromise would:
Make most Bush tax cuts permanent: The Bush-era income tax rates would be permanently extended for all income up to $400,000 ($450,000 if married). Bush tax cuts that apply to income above those levels would expire.
Effectively that means for households above those thresholds, their top rate would rise to 39.6%, up from 35% in 2012.
Plus, the capital gains and dividend tax rates for these high-income households would increase to 20% from 15%. For everyone else, investment tax rates would remain at 15% or below.
The compromise bill would also preserve the expanded parameters for the American Opportunity Tax Credit, the Child Tax Credit and Earned Income Tax Credit for 5 more years.
Permanently protect the middle class from the AMT: The bill would permanently adjust the income exemption levels for the Alternative Minimum Tax for inflation.
Most immediately, the measure would prevent close to 30 million middle-class taxpayers from having to pay the so-called wealth tax for 2012.
Without a patch for 2012 in place soon, the IRS has warned lawmakers that up to 100 million taxpayers may not be able to file their 2012 taxes until late March and their refunds would be delayed.
Passing an AMT patch with an extension of the Bush tax cuts on most income — which together make up the biggest piece of the fiscal cliff — would boost real GDP by about 1.25% in fiscal year 2013, according to earlier Congressional Budget Office estimates.
Cap itemized deductions on high-income households: The Biden-McConnell compromise would cap how much those making $250,000 (married couples making $300,000) may take in itemized deductions.
Retain key tax incentives for businesses: The bill would extend for two years several tax breaks for businesses, including a production tax credit for developers of wind projects, the research and development tax credit, and a measure allowing for bonus depreciation.
Retains several expired tax breaks for individuals: The compromise bill would extend for one or two years a few “temporary” tax breaks for individuals that regularly are extended. These include an option to deduct state and local sales taxes in place of state and local income taxes; and a deduction for elementary and secondary school teachers for certain expenses.
Permanently extend a more lenient estate tax: The legislation would preserve the current estate tax exemption level of $5.12 million but index it to inflation for future years. And it would raise the top rate to 40% from 35% currently.
If the deal is not approved, the estate tax bite would be much bigger because the exemption level is scheduled to fall to $1 million and the top rate would rise to 55%.
Extend benefits for the long-term unemployed: The bill would continue a federal extension of unemployment benefits for one year.
Without it, more than 2 million of the long-term unemployed would run out of benefits at the end of this year, according to the National Employment Law Project, an advocacy group.
Continuing the benefit extension for one year would cost an estimated $30 billion.
Prevent a cut in Medicare doctors’ pay: The Biden-McConnell compromise would prevent a scheduled 27% cut in reimbursement for Medicare services for one year. The so-called “doc fix” would boost the deficit by $31 billion.
Replace sequester for 2 months: The dreaded sequester — the automatic and blunt spending cuts to defense and nondefense programs — would be replaced for two months in 2013.
The two months of cuts would be replaced by $12 billion in new revenue and $12 billion in spending cuts.
It’s not clear what Congress will decide to do about the sequester after the two months are up. If left in place for the whole year, the sequester would have reduced spending authority in 2013 by roughly $110 billion.