Eight Things You Didn't Know Were In the Fiscal Cliff Deal
The American Taxpayer Relief Act has been discussed at length in the news and on this blog, but much of the discussion has been focused on the big provisions in the law like the extension of most of the 2001/2003/2010 tax cuts on income below $400,000/$450,000, the extension of unemployment benefits, or the delay of the sequester.
But the bill also contained a number of smaller changes that you may have not heard about with the various offsets and tax extenders. While the budgetary impact of these provisions is much smaller than the main tax changes, they do add up.
Here are a few of the less talked about provisions in the bill:
Allowing Conversion of 401(K)s to Roth Accounts: In what is probably the most notable budget gimmick in the bill, the two month delay of sequestration is partly paid for with a provision that makes it easier to convert traditional retirement accounts (i.e. 401(k)s) into Roth accounts. The essential difference between the two is that traditional retirement accounts allow pre-tax contributions (with withdrawals taxed), while Roth accounts allow tax-free withdrawals (with contributions made with after-tax income). By allowing individuals to convert, this provision essentially gives workers the option of paying taxes now that they otherwise would have paid later. This is the reason why CBO estimates the provision will reduce the deficit over the next five years, though by decreasing amounts. At best, the provision is a revenue-neutral one masquerading as revenue-increasing, but in reality those who take advantage of it are likely to be better off as a result, since they would often pay a lower tax rate now than they will in the future. Thus, the net effect could be substantial revenue loss over the long term.
Farm Bill Extension: Unknown to most observers, the fiscal cliff deal actually included an extension of the 2008 Farm Bill for 2013, preventing the so called "milk cliff" that would occur as many agricultural policies reverted back to 1949 law. The extension ended up costing about $110 million relative to CBO's baseline, which is paid for by reducing spending for nutrition education programs.
Lower Discretionary Caps in 2013 and 2014: To help pay for a two-month delay of the sequester -- which would have reduced 2013 discretionary spending (BA) by about $95 billion -- the cliff bill actually reduced the base discretionary caps under the Budget Control Act. For 2013, the legislation restores the security/non-security caps in effect before the failure of the Super Committee and reducing each cap by $2 billion ($4 billion in total) -- which essentially is the equivalent of a freeze from 2012. For 2014, the legislation allows the defense/non-defense caps go into effect and reduces each side by $4 billion ($8 billion in total), essentially allowing 1.4 percent growth from 2013.
Repeal of the CLASS Act and Create a Long-Term Care Commission: Included in the "Doc Fix" offsets was a repeal of the Community Living Assistance Service and Support (CLASS) Act, a program created under PPACA in order to provide long-term care insurance. Last year, the Department of Health and Human Services opted not to implement the CLASS Act due to design flaws which left the program structurally unsound, so in many ways this repeal is simply codifying a policy already in effect. In addition to wiping the program from the books, the legislation also establishes a blue ribbon commission to study financing and delivery of long-term care services and report its recommendations. The 15 members of the commission must be appointed by early February.
Rebased End Stage Renal Disease (ESRD) Payments: Another offset for the "doc fix" extension was $4.9 billion in savings from adjusting Medicare bundled payments for End Stage Renal Disease (ESRD) treatment. In early December, the GAO came out with a report recommending that bundled payments for ESRD be re-priced to take into account changes in behavior and utilization of drugs for dialysis. In their report, the GAO found that Medicare was paying $650-$880 million more than necessary for dialysis care in 2011 because utilization rates that year were 23 percent lower than in 2007, the year off which the payment rates were based. The ATRA takes GAO's recommendations and corrects this overpayment to better align program costs with actual utilization.
Extension of 50 Percent Bonus Depreciation: In order to match up income with its associated costs, businesses write off the cost of equipment used to produce income in future years over time using depreciation schedules. As part of the Economic Stimulus Act of 2008, businesses are allowed to deduct 50 percent of the value of the property immediately. This was designed to be a temporary stimulus policy, but has been extended, expanded, retrenched, and now as part of the cliff bill has been extended for an additional year.
Tax Giveaway for Hollywood Films: The fiscal cliff legislation retroactively extends for 2012 and through 2013 a provision to allow television and film producers to expense the first $15 million of costs incurred within the U.S. and the first $20 million if incurred in "economically depressed areas" of the U.S.
NASCAR Racetrack Subsidy: The bill retroactively extends for 2012 and through 2013 a provision that allows a seven-year cost recovery period for racetracks, a much quicker recovery period than would likely be warranted if a normal depreciation schedule were applied. This tax break is commonly known as the NASCAR loophole.
To see how the provisions in the bill add up, read our analysis in "The Good, The Bad, and The Ugly in the Fiscal Cliff Package."