United States fiscal cliff

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Budget and debt in the United States of America
Major dimensions Economy Expenditures Federal budget Financial position Military budget Public debt Taxation Unemployment Gov't spending
Programs Medicare Social programs Social Security
Contemporary issues Bowles–Simpson Commission Bush tax cuts Debt ceiling history Deficit reduction Fiscal cliff Healthcare reform Political debates Social Security debate "Starve the beast" Subprime mortgage crisis 2007–2008 financial crisis Debt-ceiling crises 2011 2013 2023 2013 budget sequestration Government shutdowns 1980 1981, 1984, 1986 1990 1995–1996 2013 Jan 2018 2018–2019 Related events 2023 Removal of Kevin McCarthy
Terminology Cumulative deficit + Interest ≈ Debt Balance of payments Inflation Continuing resolution
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The United States fiscal cliff refers to the combined effect of several previously-enacted laws that came into effect simultaneously in January 2013, increasing taxes and decreasing spending.

The Bush tax cuts of 2001 and 2003, which had been extended for two years by the 2010 Tax Relief Act, were scheduled to expire on December 31, 2012. Planned spending cuts under the Budget Control Act of 2011 also came into play. That Act was passed as a compromise to resolve a dispute concerning the US debt ceiling and address the failure of the 111th Congress to pass a federal budget. Discretionary spending for federal agencies and cabinet departments would have been reduced through broad cuts referred to as budget sequestration. Mandatory programs, such as Social Security, Medicaid, federal pay (including military pay and pensions) and veterans' benefits would have been exempted from the spending cuts.

The fiscal cliff would have increased tax rates and decreased government spending through sequestration. This would lead to an operating deficit (the amount by which government spending exceeds its revenue) that was projected to be reduced by roughly half in 2013. The previously-enacted laws causing the fiscal cliff were projected to produce a 19.63% increase in revenue and a 0.25% reduction in spending between fiscal years 2012 to 2013. The Congressional Budget Office (CBO) had estimated that the fiscal cliff would have likely caused a mild recession with higher unemployment in 2013, followed by strengthening in the labor market with increased economic growth.^[1]

The American Taxpayer Relief Act of 2012 (ATRA) addressed the fiscal cliff's revenue side by implementing smaller tax increases compared to the expiration of the Bush tax cuts. Adjustments to spending were expected to be resolved in early 2013. Intense debate and media coverage regarding the fiscal cliff triggered widespread public attention in late 2012 due to its projected short-term fiscal and economic impact.

ATRA eliminated much of the fiscal cliff's tax side while the reduction in spending caused by budget sequestration was delayed for two months. With ATRA's passage, the CBO projected an 8.13% increase in revenue and a 1.15% increase in spending for fiscal year 2013. The act caused a projected $157 billion decline in the 2013 deficit over 2012, rather than the sharp $487 billion decrease projected under the fiscal cliff.

The raise in revenue contained in the ATRA came from increased marginal income and capital gains tax rates relative to their 2012 levels for annual income over $400,000 ($450,000 for couples); a phase-out of certain tax deductions and credits for those with incomes over $250,000 ($300,000 for couples); an increase in estate taxes relative to 2012 levels on estates over $5 million; and expiration of payroll tax cuts (a 2% increase for most taxpayers earning under approximately $110,000). None of these changes would expire.^[2][3]

At 12:01 am EST on January 1, 2013, the US "technically" went over the fiscal cliff.^[4][5][6][7]

Around 2 am EST on January 1, 2013, the U.S. Senate passed this compromise bill by an 89–8 margin. At about 11 pm that evening, the U.S. House of Representatives passed the same legislation without amendments by a 257–167 vote.^[8] U.S. President Barack Obama signed it into law the next day.^[9] However, the budget sequestration was only delayed and the debt ceiling was not changed, thus triggering the United States debt-ceiling crisis of 2013.