Last-minute US fiscal cliff talks

Reuters

Tourists visit the U.S. Capitol in Washington. REUTERS/Mary Calvert

Washington - Senate leaders sought a last-minute compromise Saturday to avoid middle-class tax increases and possibly prevent deep spending cuts at the dawn of the new year as President Barack Obama warned that failure could threaten the nation's economic recovery.

The U.S. faces the so-called “fiscal cliff” in January because tax rate cuts dating back to President George W. Bush's tenure expire on December 31. The pending across-the-board reductions in government spending, which will slice money out of everything from social programs to the military, were put in place last year as an incentive to both parties to find ways to cut spending. That solution grew out of the two parties' inability in 2011 to agree to a grand bargain that would have taken a big bite out of the deficit.

Unless Obama and Congress act to stop them, about $536 billion in tax increases, touching nearly all Americans, will begin to take effect in January. That will be coupled with about $110 billion in spending cuts, about 8 percent of the annual budgets for most federal departments. Economists predict that if allowed to unfold over 2013 this double whammy would result in a big jump in unemployment, financial market turmoil and a slide back into recession.

Obama chastised lawmakers on Saturday in his weekly radio and Internet address for waiting until the last minute to try and avoid a “fiscal cliff,” yet said there was still time for an agreement. “We cannot let Washington politics get in the way of America's progress,” he said as the hurry-up negotiations unfolded.

Obama said the nation “can't afford a politically self-inflicted wound to our economy.”

Obama held an hour-long, high-stakes meeting with the leaders of Congress on Friday afternoon in a last-ditch effort to find a path to averting the automatic austerity measures that begin to take effect January 1.

Following Friday's White House meeting, aides to Senate Republican leader Mitch McConnell and Senate Majority Leader Harry Reid began racing against the clock for a bipartisan bargain. The leaders could present legislation to senators as early as Sunday, with a vote possible on Sunday or Monday.

For all the recent expressions of urgency, bargaining took place by phone, email and paper in a Capitol nearly empty except for tourists. Alone among top lawmakers, McConnell spent the day in his office.

In the Republicans' weekly address, Sen. Roy Blunt of Missouri cited a readiness to compromise. “Divided government is a good time to solve hard problems - and in the next few days, leaders in Washington have an important responsibility to work together and do just that,” he said.

Even so, there was no guarantee of success, and a dispute over the federal tax on large estates emerged as yet another key sticking point alongside personal income tax rates.

In a blunt challenge to Republicans, Obama said that barring a bipartisan agreement, he expected both houses of Congress to vote on his own proposal to block tax increases on all but the wealthy and simultaneously preserve expiring long-term unemployment benefits.

Political calculations mattered as much as deep-seated differences over the issues, as divided government struggled with its first big challenge since the November elections.

House Speaker John Boehner remained at arms-length, juggling a desire to avoid the fiscal cliff with his goal of winning another term as speaker when a new Congress convenes next Thursday. Any compromise legislation is certain to include higher tax rates on the wealthy, and rank-and-file House Republicans rejected the idea when he presented it to them as part of a final attempt to strike a more sweeping agreement with Obama.

Lawmakers have until the new Congress convenes to pass any compromise, and even the calendar mattered. Democrats said they had been told House Republicans might reject a deal until after Jan. 1, to avoid a vote to raise taxes before they had technically gone up and then vote to cut taxes after they had risen.

Nor was any taxpayer likely to feel any adverse impact if legislation is signed and passed into law in the first two or three days of 2013 instead of the final hours of 2012.

Gone was the talk of a grand bargain of spending cuts and additional tax revenue in which the two parties would agree to slash deficits by trillions of dollars over a decade.

Now negotiators had a more cramped goal of preventing additional damage to the economy in the form of higher taxes across the board - with some families facing increases measured in the thousands of dollars - as well as cuts aimed at the Pentagon and hundreds of domestic programs.

Republicans said they were willing to bow to Obama's call for higher taxes on the wealthy as part of a deal to prevent them from rising on those less well-off.

Democrats said Obama was sticking to his campaign call for tax increases for households above $250,000 in annual income, even though he said in recent negotiations he said he could accept $400,000. There was no evidence of agreement even at the higher level.

There were indications from Republicans that estate taxes might hold more significance for them than the possibility of higher income tax rates.

One senior Republican, Sen. Jon Kyl of Arizona, said late Friday he was “totally dead set” against Obama's estate tax proposal, and as if to reinforce the point, Blunt mentioned the issue before any other in his broadcast remarks. “Small businesses and farm families don't know how to deal with the unfair death tax-a tax that the president and congressional leaders have threatened to expand to include even more family farms and even more small businesses,” he said.

Several officials said Republicans want to leave the tax at 35 percent after exempting the first $5 million in estate value. Officials said the White House wants a 45 percent tax after a $3.5 million exemption. Without any action by Congress, it would climb to a 55 percent tax after a $1 million exemption on January 1.

Democrats stressed their unwillingness to make concessions on both income taxes and the estate tax, and said they hoped Republicans would choose which mattered more to them.

Taxes on dividends and capital gains are also involved in the talks, as well as a series of breaks for businesses and others due to expire at the first of the year.

Obama and congressional Democrats are insisting on an extension of long-term unemployment benefits that are expiring for about 2 million jobless individuals.

Leaders in both parties also hope to prevent a 27 percent fee cut from taking effect on January 1 for doctors who treat patients under the government's Medicare program that provides health care coverate for the elderly.

There was also discussion of a short-term extension of expiring farm programs, in part to prevent a spike in milk prices at the first of the year. It wasn't clear if that was a parallel effort to the fiscal cliff talks or had become wrapped into them.

Across-the-board spending cuts that comprise part of the cliff were a different matter.

Republicans say Boehner will insist that they will begin to take effect unless negotiators agreed to offset them with specified savings elsewhere.

That would set the stage for the next round of brinkmanship - a struggle over Republican calls for savings from Medicare, Medicaid and other federal benefit programs. Medicaid provides health care coverage to the poor.

The Treasury's ability to borrow is expected to expire in late winter or early spring, and without an increase in the $16.4

trillion limit, the government would face its first-ever default. Republicans have said they will use administration requests for an extension as leverage to win cuts in spending as they did in 2011. Obama has said he will not negotiate with congressional Republicans on raising the debt ceiling, which until last year was routinely done on a bipartisan basis. - Sapa-AP