Obama reached a deal with Republicans on Jan. 1 that kept most Americans from seeing higher income taxes. But they postponed decisions on spending cuts and raising the nation's debt limit until later in the year. And they allowed the Social Security tax cut to expire.
"All the negative news about the dysfunction in Washington surrounding the fiscal cliff negotiations contributed to the December plunge, and ongoing shenanigans concerning the debt ceiling and fiscal sanity in general continued to weigh in January," said Joshua Shapiro, chief U.S. economist at MFR Inc., in a note to clients.
Many economists predict economic growth slowed in the October-December quarter to an annual rate of around 1.2 percent. That would be much weaker that the 3.1 percent rate in the July-September quarter.
Most economists say the tax increase will hold back growth in the first quarter of 2013.
The decline in confidence comes as the economy is signaling improvement elsewhere.
A recovery in housing market is looking more sustainable and is expected to strength this year.
A separate report Tuesday showed home prices accelerated this fall, pushed higher by rising sales and a tighter supply of available homes. The Standard & Poor's/Case-Shiller 20-city home price index rose 5.5 percent in November compared with the same month a year ago. That's the largest year-over-year gain in six years.
The U.S. auto industry and financial sector are also picking up.
Auto sales reached a five-year high of 14.5 million in 2012. Analysts expect sales will climb even higher this year, to 15.5 million.
Stocks are near their all-time highs. The Standard and Poor's 500 has more than doubled from its low in 2009.
Still, the job market remains sluggish. Employers have added an average of about 150,000 jobs a month for the past two years. That's enough for a gradual decline in the unemployment rate, which remains high at 7.8 percent.