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Louis Jacobson
By Louis Jacobson January 2, 2013
Molly Moorhead
By Molly Moorhead January 2, 2013

'Fiscal cliff' bill limits tax breaks for higher-income taxpayers

In passing a tax bill to forestall the "fiscal cliff" -- the overnight rise of a wide array of taxes combined with deep spending cuts -- lawmakers agreed to cut back on certain tax exemptions for high-earning households.

During the 2008 presidential campaign, Barack Obama promised to limit personal exemptions and itemized deductions for high-income tax filers. These provisions were in force in the 1990s, but under President George W. Bush, they were minimized starting in 2006 and ultimately eliminated by 2010. The elimination continued for an additional two years following a December 2010 agreement between Obama and Congressional Republicans, but they were poised to return in full force as a part of the fiscal cliff.

The fiscal cliff bill, passed by the House and Senate on Jan. 1, 2013, did something very close to what Obama pledged in 2008. The bill brought back the Personal Exemption Phaseout, commonly known as PEP, as well as the "Pease limitation" for taxpayers earning $250,000 (for individuals) and $300,000 (for couples filing jointly).

In practical terms, the provision increases the amount of tax paid by filers who make at least this much in income. It will do so by limiting how much high earners can claim on their return as personal exemptions and itemized deductions. Taxpayers below the income thresholds are not affected.

The income thresholds are slightly different than what Obama had envisioned, but they are close. We rate this a Promise Kept.

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Angie Drobnic Holan
By Angie Drobnic Holan December 21, 2010

Current tax rules continued for high earners

With 2010 coming to a close, President Obama brokered a major deal on taxes, agreeing to continue the current tax rates for high earners. He said repeatedly during the campaign that he intended to let them expire. The tax rates, passed during President George W. Bush's administration, were set to go up in 2011.

Obama also said during the campaign that he wanted to reduce the exemptions and deductions for which high earners qualify. This would have the effect of making their tax bills higher. But the tax compromise Obama signed into law continued the current levels on exemptions and deductions.

We should note that although he gave in on his campaign promise, Obama got some other things in return. The current tax rates were extended for couples who make less than the $250,000 cut-off as well, and some tax cuts that were part of the 2009 economic stimulus law were also continued. Additionally, Obama won another year of unemployment benefits for workers who qualified, and he won a one-year reduction of Social Security taxes, putting 2 percent of pay back into workers' paychecks.

Obama said he still opposed leaving taxes the same for the wealthy, even though he agreed to the extension.

"I'm as opposed to the high-end tax cuts today as I've been for years," Obama said in a press conference on Dec. 7, 2010. "In the long run, we simply can't afford them. And when they expire in two years, I will fight to end them, just as I suspect the Republican Party may fight to end the middle-class tax cuts that I've championed and that they've opposed."

There's a case to be made that Obama is not completely backing off his campaign promises. He agreed to only a two-year extension of the rates, not making them permanent.

However, Obama said again and again during the campaign that he wanted to increase taxes on high earners. The current tax rates are now scheduled to expire at the end of 2012, just as Obama completes his first term. At that time, we'll revisit this promise to see where it stands. For now we rate it Promise Broken.

Angie Drobnic Holan
By Angie Drobnic Holan February 26, 2009

Obama budget proposes to curtail exemptions and deductions

President Obama's Office of Management and Budget unveiled a broad outline of its plans for the 2010 budget on Feb. 26, 2009, highlighting investments in health, energy and education.

To pay for some of those items, Obama proposed allowing the Bush tax cuts to expire as scheduled on people who make more than $200,000 and couples who make more than $250,000. For those same income levels, he plans to restore phaseouts for personal exemptions and deductions. This would limit the amount that higher earners could write off as tax deductible or tax exempt. According to the budget documents, this change would begin in 2011.

Obama's budget still has to be approved by Congress, where Republicans are likely to oppose any effort to let the Bush tax cuts expire. So for now, we rate this promise In the Works.


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