Obama signs 'cliff' bill, now on to next fiscal crisis

HONOLULU -- The White House and a divided Congress can now move on to the next fiscal crisis after a last-minute deal to avert the "fiscal cliff" laid the foundation for more combustible struggles over taxes, spending and debt in the next few months.

President Obama's victory on taxes this week was the second, grudging round of a piecemeal battle in as many years over mountainous U.S. deficits.

Despite the length and intensity of the debate, the deal to raise the top income tax rate on families earning over $450,000 a year - about 1% of households - and including only $12 billion in spending cuts turned out to be a relatively easy vote for many members of Congress. This was particularly so because the alternative was to raise taxes on everyone.

Obama signed the bill Wednesday night.

In banking $620 billion in higher taxes over the coming decade from wealthier earners, Obama and his Republican rivals have barely touched deficits still expected to be in the $650 billion range by the end of his second term. And those calculations assume policymakers can find more than $1 trillion over 10 years to replace automatic across-the-board spending cuts known as a sequester.

"They didn't do any of the tough stuff," said Erskine Bowles, chairman a 2010 deficit commission. "We've taken two steps now, but those two steps combined aren't enough to put our fiscal house in order."

In 2011, the government adopted tighter caps on day-to-day operating budgets of the Pentagon and other Cabinet agencies to save $1.1 trillion over 10 years.

The measure passed Tuesday prevents automatic tax hikes for everyone but higher-income earners. It also blocks severe across-the-board spending cuts for two months, extends unemployment benefits for the long-term jobless for a year, stops a 27 percent cut in fees paid to doctors treating patients under the Medicare program for the elderly, and prevents a possible doubling of milk prices.

The alternative was going over the cliff, an economy-punching half-trillion-dollar combination of sweeping tax increases and spending cuts. Despite the deal, the government partially went over the brink anyway with the expiration of a two-year cut in payroll taxes for the Social Security pension program.

Action inside a dysfunctional Washington now only comes with binding deadlines. So, naturally, this week's hard-fought bargain sets up another crisis in two months, when painful across-the-board spending cuts to the Pentagon and domestic programs are set to kick in and the government runs out of the ability to juggle its $16.4 trillion debt without having to borrow more money.

Unless Congress increases or allows Obama to increase that borrowing cap, the government risks a first-ever default on U.S. obligations. Republicans will use this as an opportunity to leverage more spending cuts from Obama, just like they did in the summer of 2011.

House of Representatives Speaker John Boehner, the top Republican in Washington, vows that any increase in the debt limit - which needs to be enacted by Congress by the end of February or sometime in March - must be accompanied by an equal amount in cuts to federal spending. That puts him on yet another collision course with Obama, who has vowed anew that he won't let haggling over spending cuts complicate the debate over the debt limit.

The cliff compromise represented the first time since 1990 that Republicans condoned a tax increase. That has whipped up a fury among lawmakers from the conservative tea party movement and increased the pressure on Boehner to adopt a hard line in coming confrontations over the borrowing cap and the spending cuts that won only a two-month reprieve in this weeks' deal.

Put simply, House Republicans are demanding new spending cuts - possibly through changes in Social Security and Medicare benefit formulas - as a scalp, and they're dead set against raising more revenues through anything less than an overhaul of the tax code now that Obama has won higher taxes on the wealthy.

"Now the focus turns to spending," Boehner said after Tuesday's vote, promising that future budget battles will center on "significant spending cuts and reforms to the entitlement programs that are driving our country deeper and deeper into debt."

Obama is just as adamant on the other side, saying higher revenues have to be part of any formula for further diverting the automatic spending cuts.

The refusal of Republicans to consider additional new taxes is sure to stir up resistance among Democrats when they're asked to consider politically painful cuts to so-called entitlement programs like Medicare. Democratic protests led Obama and Boehner to take a proposal to increase the Medicare eligibility age off the table in the recent round of talks.

The upshot? More scorched-earth politics on the budget will probably dominate the initial few months of Obama's second term, when the president would prefer to focus on legacy accomplishments like fixing the immigration problem and implementing his overhaul of health care.

Associated Press