The U.S. House passed a bill undoing income tax increases formore than 99 percent of households, giving a victory to PresidentBarack Obama even as Republicans vowed to fight him in coming weeksfor spending cuts in exchange for raising the debt ceiling.

The 257-167 vote just after 11 p.m. yesterday capped atension-filled final push as Republicans balked at a bipartisanSenate bill. House Speaker John Boehner ordered a vote even though151 of 236 Republicans, including Majority Leader Eric Cantor,ultimately voted no. Obama said he'd sign it into law.

“The deficit needs to be reduced in a way that's balanced,”Obama said at the White House. He said top earners and corporationsshould pay even more and that Congress must raise the debt ceiling.“Everyone pays their fair share. Everyone does their part,” hesaid.

The final days of drama surrounding the so-called fiscal cliffof scheduled tax increases and spending cuts illustrated thepartisan struggle that has made U.S. budget policy unpredictableand prone to crises as deadlines approach. Obama wielded theleverage he gained in his Nov. 6 re-election. Still, he fell shortof reaching with Republicans a larger deficit-reduction grandbargain.

Republicans immediately turned to their next battle — a bid touse the need to raise the nation's $16.4 trillion debt ceiling toforce Obama to accept cuts in entitlement programs such asMedicare. Congress must act as early as mid-February to prevent adefault and the dispute may reprise a similar 2011 episode that ledto a downgrade of the U.S. credit rating.

“Without meaningful reform of entitlements, real spendingcontrols, and a fairer, cleaner tax code, our debt will continue togrow, and our economy will continue to stumble,” Boehner said in astatement after the vote.

Obama said he's “very open to compromise.” Medicare spending canbe reduced, he said, yet “we can't simply cut our way toprosperity.”

Futures on the Standard & Poor's 500 Index expiring in Marchadded 1.6 percent to 1,442.4 at 7:23 a.m. in New York. The equitybenchmark surged 1.7 percent on Dec. 31, the biggest rally on thefinal day of a year since 1974, as Republican and Democraticlawmakers made last-minute concessions to finalize the deal. DowJones Industrial Average futures soared 168 points, or 1.3 percent,to 13,200 at 7:23 a.m. The benchmark 10- year yield for Treasurybonds rose seven basis points, or 0.07 percentage points, to 1.83percent at 7:33 a.m. in New York.

Payroll Taxes

The largest economic impact of the budget accord will come fromending a two-percentage-point payroll tax cut, a move that willshrink paychecks for U.S. workers immediately even as most incometax cuts that expired Dec. 31 are being extended permanently.

The payroll cut's lapse will pull more than $100 billion out ofthe economy in 2013 and is the primary reason why 77.1 percent ofU.S. households will face higher taxes this year, according to thenonpartisan Tax Policy Center in Washington.

The Republican-controlled House yesterday almost unraveled abipartisan agreement brokered over the waning days of 2012 by VicePresident Joe Biden and Mitch McConnell of Kentucky, the SenateRepublican leader. The Senate passed that bill 89-8 in the firsthours of Jan. 1. In last night's House vote, 85 Republicans and 172Democrats voted for the measure, while 16 Democrats and 151Republicans opposed it.

Compared with continuing 2012 policies, the agreement wouldincrease taxes by $620 billion over the next decade, according tothe White House. The federal budget will be $4 trillion bigger thanprojected had all the scheduled tax boosts been retained.

Republicans claimed a victory because the bill ends thetemporary nature of most of the tax cuts that President George W.Bush campaigned on in 2000 and were scheduled to lapse at the endof 2010 and then again in 2012.

“We're making permanent tax policies Republicans originallycrafted,” said Representative Dave Camp, a Michigan Republican andthe chairman of the tax-writing Ways and Means Committee.

In addition to tax increases on top earners, the bill extendsexpanded unemployment benefits and continues refundable tax creditsfor low-income families and college students. It would also delayby two months automatic cuts scheduled to start this month,offsetting the $24 billion cost with a blend of additional revenueand spending reductions, half of which would come from defense.

'More Spending'

“It's unbelievable that what you see in there is more spendingas opposed to less spending,” said Representative Rob Woodall, aGeorgia Republican, about the Senate-passed bill.

Boehner put the bipartisan Senate compromise to an up-or- downvote last night after it became clear that he couldn't add spendingcuts with Republican votes alone, especially with fewer than twodays before the new Congress is sworn in.

Yesterday's episode demonstrated again the fractiousness ofHouse Republicans, who passed bills in 2012 that would extend theexpiring tax cuts for all income levels and replace the automaticspending cuts with other policies.

They eventually ceded control of the fiscal-cliff debate to theadministration and the Senate. Boehner couldn't reach an agreementwith Obama, and he couldn't get House Republicans to back a planthat set the threshold for tax increases at $1 million inincome.

Instead, at the last minute, he was forced to accept a deal thatcontained few of the Republican priorities he could have gotten byaccepting what Obama was offering on Dec. 17.

Boehner's recent difficulty in getting his members to follow hisrecommendations “all rolls off his back” because “he feels prettyconfident about his leadership, about the strength of hisleadership,” said Florida Republican Rich Nugent, a first-yearHouse member.

Boehner isn't “looking over his back and worried about it, atleast he doesn't exhibit that to us,” Nugent said.

Nor should Boehner be worried about challenges to hisspeakership, said Nugent, a former sheriff.

“Having been a chief executive, there's always people who agreeand disagree with your leadership,” he said.

The bill would reinstate tax cuts that expired Dec. 31 ontaxable income of individuals up to $400,000 and of married couplesof up to $450,000, leaving those top earners with a marginal taxrate of 39.6 percent, up from 35 percent last year.

Carried Interest

Those same households would pay higher tax rates on theirdividends and capital gains, including private-equity managers'carried-interest income. The top rate will go to 23.8 percent,including taxes from the 2010 health-care law that took effectyesterday.

Many households with incomes above $500,000 won't face thehigher rates at all, because deductions are subtracted from grossincome before the rates are assessed.

Limits on itemized deductions and personal exemptions will alsoreturn, starting at $250,000 of income for individuals and $300,000for married couples.

The deal would set the top estate-tax rate at 40 percent,splitting the difference between the parties' positions. Theper-person exemption will be more than $5 million and indexed forinflation.

The burden of higher taxes will fall hardest on the top 1percent and particularly on the top 0.1 percent of taxpayers. Thosemaking more than $2.7 million will pay an average of $443,910 morein 2013, or 26 percent of the additional burden, according to theTax Policy Center. Households with income between $500,000 and $1million will pay an average of $14,812 more.

Miscellaneous tax breaks will get extended through 2013,including the production tax credit for wind energy and the taxcredit for corporate research.

The boundaries of the fiscal debate have shifted repeatedlysince Congress began focusing on deficit reduction in 2010.

Lawmakers missed an opportunity to use the fiscal cliff theycreated to force themselves to act, said Alan Simpson and ErskineBowles, the co-chairmen of Obama's 2010 fiscal panel.

“Even after taking the country to the brink of economicdisaster, Washington still could not forge a common-sensebipartisan consensus on a plan that stabilizes the debt,” they saidin a statement.

Democrats Recover

What's happening instead is deficit reduction achieved in fitsand starts. Democrats see a multi-stage game where they lost badlyin 2011 and have now recovered their footing to insist on pairingtax increases with spending cuts.

In 2011, using the debt ceiling as leverage, Republicans gotObama to agree to more than $1 trillion in spending cuts plusanother $1.2 trillion still set to start this year.

A 2011 deficit-reduction supercommittee deadlocked, pushing theissue into the 2012 election. Democrats were able to prevail onlyafter Obama won a second term campaigning on tax increases, whileDemocrats gained seats in the House and Senate.

Republicans, particularly in the House, want to insist onspending cuts at every turn. Although they failed in this round,they drove that argument in last year's debt-ceiling fight, andthey will replay it in the next few weeks.

The U.S. hit the debt limit Dec. 31 and the Treasury Departmentbegan employing so-called extraordinary measures to finance about$200 billion in deficits in 2013.

A debt limit increase will be needed as early as mid- February,according to the Congressional Budget Office, and the automaticspending cuts will start taking effect March 1.

Last night Obama said he won't “have another debate with thisCongress over whether or not they should pay the bills they'vealready racked up.”

Republicans want to replay their demand that debt limitincreases be matched dollar-for-dollar with spending cuts.

Obama said he wants future deficit-reduction deals to feature a“balanced” approach that includes spending cuts and further taxincreases.

Bloomberg News

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