Three scenarios that could emerge from fiscal cliff negotiations

Senators from both major political parties expressed optimism on Dec. 28 that some sort of agreement could be reached to avoid tax increases and spending cuts totaling roughly $600 billion – the so-called "fiscal cliff" – that would take effect if Congress fails to reach a compromise before Jan. 1, 2013.

“I am hopeful there will be a deal that avoids the worst parts of the fiscal cliff, namely taxes going up on middle-class people,’’ Sen. Chuck Schumer (D-N.Y.) said during an interview on NBC's TODAY show. “I think there can be, and I think the odds are better than people think that there could be.’’

“I think in the end we’ll get a deal,’’ Sen. John Thune (R-S.D.) said during the same broadcast segment. “The question is the timing of that. It is encouraging that sides are sitting down. They continue to have lines of communication there open, and I view that as optimistic as well.”

TODAY reported that Senate and House Majority and Minority leaders are scheduled to meet with President Barack Obama later in the day on Dec. 28, and members of Congress are expected to work on a possible agreement through the weekend of Dec. 29-30.

Clearly, negotiators will need to work quickly – or come to some interim agreement, according to CCH, a Wolters Kluwer business specializing in tax, accounting and audit information and services.

George Jones, JD, CCH senior federal tax analyst, expressed skepticism: "While a deal looked close on several occasions during negotiations, it's been elusive so far. Whether a resolution can be reached before Congress recesses for the year grows dimmer as the days progress."

If talks stall, terms of the Budget Control Act of 2011 are scheduled to go into effect on Jan. 1, including a series of across-the-board spending cuts and tax increases.

CCH outlined three scenarios that could transpire over the next few days:

1) A full resolution is reached.
The Presidential and Senate Democratic proposal and the Republican plan still remain miles apart. Most attention has focused on the divide between the tax increases in the Democratic proposal on incomes of more than $200,000 for single filers and $250,000 for joint filers; and the spending cuts in the Republican proposal, particularly to entitlement programs.

"Last week it seemed President Obama and House Speaker [John] Boehner were circling in on a middle ground, but that fell apart and it's not clear they will be able to return to those positions to resume negotiations this week," said Jones.

The president had mentioned being open to a $400,000 threshold on income tax rates at one point.

2) Parties reach an agreement "in principle" with details worked out in 2013.
A full resolution would require reaching an agreement, finalizing the bill and getting it voted on in both the House and Senate. That may not be possible with the time left, according to Jones.

"They could pass legislation establishing a framework of general tax increases and/or spending cuts and allow the new Congress to work out the details early next year."

3) No agreement is reached and the Bush-era tax cuts fully expire.
Not only would this increase taxes across the board based on income, it also would make an estimated 20 million additional families subject to the alternative minimum tax, raise the capital gains rate and tax dividends as ordinary income, according to CCH. Additionally, the child tax credit would be cut by one-half to $500 from $1,000 and the estate tax would revert to 55 percent with a $1 million exemption amount compared to 2012's 35-percent maximum estate tax after a $5.12 million exemption, among other tax impacts.

"Even if we go over the fiscal cliff, Congress could act early next year to reach a compromise and make any agreement retroactive to the beginning of the year," said Jones. "However, this would not be the ideal scenario for most taxpayers, businesses or investors – most of whom would prefer some degree of certainty heading into 2013."