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Kimberly Amadeo

Plan "B" Scrapped. Now What?

By December 21, 2012

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Last night, the Republican Party caucus scrapped House Speaker John Boehner's Plan "B" to avoid the fiscal cliff.   The plan included a tax increase on incomes above $1 million. Too many Republicans were worried they would get voted out of office in the next election if they allowed ANY tax increase whatsoever. The Plan was doomed from the start, as Senate leadership said they wouldn't pass it. Dow futures immediately dropped more than 200 points in response, rebounding somewhat when the market opened.

Now it's up to President Obama and the Democrats to salvage enough of Plan "A" to get the bipartisan votes needed to pass it before January 1. Speaker Boehner did say he would work with the President to get the Republicans needed to pass a modified bill.  The House may come back to work as soon as December 27.

Here's a comparison of Plan A and Plan B.  As you can see, in many areas the two are not far off. If you compare it to where they were two weeks ago (Read Compare Fiscal Cliff Proposals),  you'll see a lot of progress HAS been made.

(Note: The savings/additional revenue are average annual, unless otherwise noted).

  1. Bush tax cuts -  Plan A: Don't extend for incomes above $400,000 (revised from $250,000). On average, additional revenues will total $120 billion a year. Let estate taxes revert to a 45% rate, after exempting the first $3.5 million. Plan B: Eliminate mortgage and charity deduction ($80 billion). Don't extend for incomes above $1 million ($14 billion).  Scale back some child care and education tax credits. Let estate taxes revert to a 35% rate, after exempting the first $5 million. Both: Extend for those earning below $250,000. Allow top tax rate to reach 39.6% instead of 35%. Increase capital gains and dividend taxes from 15% to 20%. Reduce deductions for the wealthy.
  2. Alternative minimum tax - Plan A: Create a permanent cap . Plan B: Not addressed
  3. Obamacare taxes - Plan A: Keep as is. Plan B: Not addressed.
  4. Payroll tax cut - Both: Allow to return to old level, or 2 percentage points higher than it is today.
  5. Extended unemployment benefits - Plan A: Extend for one more year ($30 billion). Plan B: Not addressed
  6. Sequestration - Both: No.

Second, here's their positions on additional stuff that has nothing to do with the cliff specifics, but are thrown into negotiations to further stimulate the economy or reduce the debt.

  • Debt Ceiling: Plan A: Raise enough to cover the next two years: Plan B: Raise debt ceiling $1 trillion.
  • Build roads - Plan A: ($50 billion). Plan B: Not addressed.
  • Tax cuts for businesses - Plan A: Extend tax acceleration for depreciation. ($25 billion). Extend research and development tax credit.  Plan B: Not addressed
  • Refinance mortgage incentives  - Plan A: Yes. Plan B: Not addressed.
  • Cut Medicare and Medicaid -  Plan A: Limit cuts to $40 billion. Plan B: Cut at least $60 billion. Both: Change cost of living adjustment formula or COLA ($13 billion). Extend "doc fix" to prevent a 27% decrease in payment reimbursement. Oppose raising eligibility from 65 to 67.
  • Defense spending - Plan A: Cut $10 billion. Plan B: Restore $9.7 billion in cuts.
  • Non-defense discretionary spending cuts - Plan A:  Cuts to farm and other benefit programs ($20 billion). Cuts to parks,  transportation and education ($10 billion).   Plan B: $314 billion through higher pension payments from Federal employees, cuts in food stamps and Obamacare.  Both: Change how COLA is calculated. This would reduce benefits for Federal and veteran pensions, and raise taxes on lower income families.

(Sources: WaPo, How Boehner's Plan B Fell Apart, December 21, 2012; CNBC: Boehner Says GOP Open to Deal, December 21, 2012; AP, Fiscal Cliff Plan, December 18, 2012;  CNN Money, Obama Plan Has $200 Billion in Boosters, December 4, 2012; CNN, House GOP Offers Plan to Avoid Fiscal Cliff, December 4, 2012)

What It Means to You

Even if there is no bill before January 1, the damage from the fiscal cliff will happen over time, not instantly. Analysts who say "we will immediately go into recession" don't understand economics. If the new Congress works out a deal within 30 days, it will be retroactive and only temporary damage will be done.

However, the fiscal cliff will immediately impact those who see their benefits cut off, like the unemployed. It will also show up in higher withholdings on your paycheck. Therefore, expect some pain and disruption in certain sectors, which will slowly spread to the rest of the economy if nothing is done.

Folks, it appears that Washington is incompetent. However, we are witnessing a major shift in political power. The refusal of Tea Party hardliners to compromise is understandable -- they are holding true to their constituents. On the other hand, they may find themselves marginalized if Plan A passes. Stay tuned, as you are witnessing history in the making.

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