Bigger budget fights loom after fiscal cliff deal

President Barack Obama makes a statement following passage by the House of Representatives for tax legislation on Tuesday, January 1, 2013, in Washington, D.C. Vice President Joe Biden joined the president on stage.
McClatchy-Tribune
President Barack Obama makes a statement following passage by the House of Representatives for tax legislation on Tuesday, January 1, 2013, in Washington, D.C. Vice President Joe Biden joined the president on stage.
Posted Jan. 02, 2013, at 7:59 p.m.

WASHINGTON — President Barack Obama and congressional Republicans face even bigger budget battles in the next two months after a hard-fought “fiscal cliff” deal narrowly averted devastating tax hikes and spending cuts.

The agreement, approved late on Tuesday by the Republican-led House of Representatives, was a victory for Obama, who had won re-election in November on a promise to address budget woes, partly by raising taxes on the wealthiest Americans.

But it set up potentially bruising showdowns over the next two months on spending cuts and an increase in the nation’s limit on borrowing. Republicans, angry the fiscal cliff deal did little to curb the federal deficit, promised to use the debt-ceiling debate to win deep spending cuts next time.

Republicans believe they will have greater leverage over Obama when they must consider raising the borrowing limit in February because failure to close a deal could mean a default on U.S. debt or another downgrade in the U.S. credit rating. A similar showdown in 2011 led to a credit downgrade.

“Our opportunity here is on the debt ceiling,” Sen. Pat Toomey, R-Pa., said on MSNBC. “We Republicans need to be willing to tolerate a temporary, partial government shutdown, which is what that could mean.”

But Obama and congressional Democrats may be emboldened by winning the first round of fiscal fights when dozens of House Republicans buckled and voted for major tax hikes for the first time in two decades.

“This bill was far from perfect, but it reflects a true bipartisan compromise to ensure that all middle and lower-income Americans do not see their income tax rates increase,” said Rep. Mike Michaud, D-Maine.

“The bottom line for me was an agreement that protects working families from a big tax increase, keeps milk prices from going through the roof and doesn’t pull the rug out from under people who are still struggling in this economy,” said Rep. Chellie Pingree, D-Maine.

“We believe that passing this legislation greatly strengthens the president’s hand in negotiations that come next,” House Minority Leader Nancy Pelosi told NBC in an interview to air on Thursday.

Deteriorating relations between leaders in the two parties do not bode well for the more difficult fights ahead. Vice President Joe Biden and Republican Senate leader Mitch McConnell had to step in to work out the final deal as the relationship between House Speaker John Boehner and Obama unraveled.

Senate Majority Leader Harry Reid also drew the ire of Boehner after a tense meeting last week, aides said. Reid had accused Boehner of running a “dictatorship” in the House.

Bemoaning the intensity of the fiscal cliff fight, Obama urged “a little less drama” when the Congress and White House next address budget issues such as the government’s rapidly mounting $16 trillion debt load. He vowed to avoid another divisive debt-ceiling fight before the late February deadline for raising the limit.

“While I will negotiate over many things, I will not have another debate with this Congress about whether or not they should pay the bills they have already racked up,” Obama said before he headed to Hawaii to resume an interrupted vacation.

Financial markets that had been worried about the fiscal cliff showdown welcomed the deal, with U.S. stocks recording their best day in more than a year. The S&P 500 achieved its biggest one-day gain since Dec. 20, 2011, pushing the benchmark index to its highest close since Sept. 14.

The debate over “entitlement” programs is also bound to be difficult. Republicans will be pushing for significant cuts in government health care programs such as Medicare and Medicaid for retirees and the poor, which are the biggest drivers of federal debt. Democrats have opposed cuts in those popular programs.

“This is going to be much uglier to me than the tax issue … this is going to be about entitlement reform,” Republican Senator Bob Corker of Tennessee said on CNBC.

“Now that we have this other piece behind us — hopefully — we’ll deal in a real way with the kinds of things our nation needs to face,” he said.

The fiscal cliff crisis ended when dozens of Republicans in the House relented and backed a bill passed by the Democratic-controlled Senate that hiked taxes on household income above $450,000 a year. Spending cuts of $109 billion in military and domestic programs were delayed for two months.

Economists had warned that the fiscal cliff of across-the-board tax hikes and spending cuts would have punched a $600 billion hole in the economy this year and threatened to send the country back into recession.

Maine taxpayers would have had to pay $1.4 billion more in income, payroll and estate taxes, according to calculations by Mike Allen’s, Maine’s associate commissioner for tax policy.

Approximately $355 million of that sum would have resulted from the end of the payroll tax holiday, Allen said. Since 2011, the payroll tax holiday has lowered the Social Security payroll tax deducted from paychecks to 4.2 percent of income from 6.2 percent.

On the spending side of the equation, 7,100 Mainers would have seen their extended unemployment benefits end, according to Julie Rabinowitz, spokeswoman for the Maine Department of Labor.

Starting in January, people eligible for unemployment benefits would have been able to receive only the standard 26 weeks of state unemployment benefits, without the federal extensions afterward that allowed the jobless to receive checks for up to 99 weeks.

“Even if they do extend it, there’s no way of knowing how long and for what populations of that 7,000,” Rabinowitz said Monday before a deal was reached. “It’s always in everybody’s best interest to actively be looking for work or seeking training, rather than wait to see what Congress’ decision is going to be.”

The defense portion of the federal budget would have been hit especially hard, raising the possibility of cuts that would affect Maine companies heavily dependent on military contracts, like Bath Iron Works, Pratt & Whitney and General Dynamics.

At Bath Iron Works, whose sole business is building warships for the Department of Defense, company spokesman James Demartini said Monday that business progressed as usual as lawmakers strung together a deal.

“In terms of BIW, we’re coming back to work [Wednesday] just like we always do and continue to work on the contracts that are under our wing right now,” he said.

BIW is in the midst of building three next-generation Zumwalt-class destroyers. Demartini said those ships were all funded in prior fiscal years and likely wouldn’t have been affected by the fiscal cliff.

The Maine Department of Education this fall alerted school districts to prepare for cuts to their career and technical and special education funding streams. They also were told to anticipate reduced Title I and Title II funds, which, respectively, help schools educate low-income students and offer teachers professional development opportunities.

The education funding cuts, however, weren’t likely to affect school districts during the current school year; districts would have seen their funding drop at the start of the 2013-14 school year.

Federal spending cuts, a ccording to AARP, would have meant a 29 percent cut to the reimbursement rates doctors and other health care providers receive for seeing Medicare patients.

“That’s the kind of cut that is catastrophic and would cause a lot of doctors to say, ‘I’m not going to do this anymore,’” and reduce their Medicare patient load or decide not to see Medicare patients altogether, said Gordon Smith, executive vice president of the Maine Medical Association.

BDN writers Matthew Stone and Christopher Cousins contributed to this report.

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