The fiscal cliff involves US$600 billion in automatic tax hikes and spending cuts effective in early 2013 if US lawmakers fail to agree on reducing the budget deficit.
All eyes on Republicans as House set to vote on 'fiscal cliff' deal
Senate backs last-minute bill to avoid 'fiscal cliff' but horse trading continues on Capitol Hill
The dramatic deal struck by the White House and top Republicans to avert huge new year tax rises and postpone automatic spending was heading to the House of Representatives this morning (Hong Kong time).
A vote was expected as early as today as Vice-President Joe Biden was dispatched to Capitol Hill to win over reluctant Democrats and Republican House Speaker John Boehner huddled with members of his restive caucus.
After months of agonising over the crisis, weeks of debate about a possible solution, and days of intense, closed-door negotiations, members of the Senate voted overwhelmingly by 89-8 to pass a controversial bill that averts the so-called "fiscal cliff".
President Barack Obama urged the House to "pass it without delay".
If the measure is accepted by both chambers of Congress, it would hand Obama a victory by raising tax rates on households earning over US$450,000 a year.
"While neither Democrats nor Republicans got everything they wanted, this agreement is the right thing to do for our country and the House should pass it without delay," Obama said.
The deal puts off US$109 billion in budget cuts across the government for two months, but in the process sets the stage for a new showdown between Obama's Democrats and Republicans in dysfunctional Washington at the end of February.
"There's more work to do to reduce our deficits, and I'm willing to do it," Obama said.
Biden, who negotiated the deal with the top Senate Republican Mitch McConnell, trooped to Capitol Hill to sell it to Democratic senators, some of whom wanted a lower threshold for tax rises.
Had no deal been struck, experts warned that the fragile US economy could have been sent spinning back into recession by the US$500 billion combined whack from spending cuts and tax increases. In the end, the deal was clinched a few hours before a midnight deadline. The Senate vote came just after 2am.
For two decades, Republicans have fought any attempt to raise taxes, so White House officials will see vindication in a deal that enshrines one of Obama's top re-election campaign pledges.
The deal means a return to Bill Clinton-era tax rates for top earners to 39.6 per cent, starting for couples who make US$450,000 a year. Obama had campaigned for tax increases on household income above US$250,000.
Signs that a deal could be close cheered investors as US markets rose before closing for the year. The Dow Jones Industrial Average closed up 1.28 per cent at 13,104.14.
Key points in the "fiscal cliff" deal
- Postpones for two months the start of US$1.2 trillion in automatic spending cuts over 10 years.
- Raises US$600 billion in revenue over 10 years through a series of tax increases on wealthier Americans.
- Permanently extends tax cuts made in 2001 by Republican president George W. Bush for income below US$400,000 per individual, or US$450,000 per family. Income above that will be taxed at 39.6 per cent, up from 35 per cent.
- Above that income threshold, capital gains and dividend tax rates will return to 20 per cent, from 15 per cent.
- Caps personal exemptions and itemised deductions for income above US$250,000, or US$300,000 per household.
- Raises estate tax rate to 40 per cent for estates of more than US$10 million per couple, up from 35 per cent.
- Extends unemployment insurance benefits for one year for 2 million people.