On August 2, the last day that Treasury has said it will be able to pay its bills under the current debt ceiling, the U.S. Senate agreed to a measure passed in the House on August 1. The legislation, which, for the first time, links an increase in the debt limit to budget decisions, will permit the president to raise the debt ceiling by $900 billion and allow the U.S. Treasury to fund the government's operations through 2013.
Both houses of Congress passed the measure with comfortable margins - 74 senators voted in favor and 26 opposed - and with bi-partisan support. In the House of Representatives the compromise plan passed by a vote of 269 to 161. President Obama signed the bill within hours of the Senate vote.
Minutes before the conclusion of voting in the House, the chamber erupted in applause and cheering as Congresswoman Gabrielle Giffords, in her first appearance on the House floor since she suffered a gunshot wound in January, came to the floor to vote in favor of the bill, which received the support of 95 Democrats.
The bill to raise the debt ceiling calls for $2.4 trillion in spending cuts in two stages over ten years. The first stage allows an immediate increase in the debt limit of $400 billion, to be followed by an additional $500 billion, following some complex legislative maneuvers. Domestic discretionary programs will be cut by $917 billion.
In the second stage, a special Joint Committee of Congress will recommend further deficit reduction steps totaling $1.5 trillion or more, with Congress mandated by law to vote on the committee's proposals by the end of the year.
When President Obama signs this legislation into law, the committee will be comprised of 12 members -- six from each chamber, equally divided between Democrats and Republicans. The panel's recommendations will be due by November 23 and guaranteed an up-or-down vote in Congress without amendments by December 23.
If the committee's recommendations are enacted, Obama would be authorized to increase the debt ceiling by up to $1.5 trillion.
If the recommendations are not enacted, the president can still raise the debt ceiling by $1.2 trillion, but a budget "trigger" a so-called "enforcement mechanism", would kick in, imposing mandatory across-the-board spending cuts effective January 1, 2013. The cuts would match the size of the debt ceiling increase, and be divided equally between defense and nondefense spending.
The long-term impact on taxpayers depends on the ability of the committee and Congress to reach an agreement by the end of 2011. Taxpayers may see some combination of tax reform and spending cut legislation emerge from the bi-partisan, bi-cameral committee.
The Bush tax cuts are set to expire on January 1, 2013, the same date that the "enforcement mechanism" of this legislation would go into effect. The two events should give Congress some incentive to come up with a plan, the White House says in its fact sheet, but taxpayers and their accountants will have to cope with uncertainty until the Special Joint Committee concludes its deliberations and Congress acts.
If President Obama is re-elected he has said he will not sign a renewal of the Bush tax cuts.
The debt ceiling debate in Congress amounted to "the biggest usurpation of time and energy that I have ever seen", Former Senator Pete Domenici (R-NM), told The Hill. Congress will adjourn for its summer recess without enacting any appropriations bills and will have only three weeks to vote on them before the new fiscal year beginning October, or the government faces a shutdown.