Negotiations resume to avoid ‘fiscal cliff’

Senate Majority Leader Harry Reid, D-Nev., retreats to a private meeting with fellow Democrats as he and Senate Minority Leader Mitch McConnell, R-Ky., work to avoid the “fiscal cliff” Sunday in Washington.
Senate Majority Leader Harry Reid, D-Nev., retreats to a private meeting with fellow Democrats as he and Senate Minority Leader Mitch McConnell, R-Ky., work to avoid the “fiscal cliff” Sunday in Washington.

— Negotiations over a last-ditch agreement to head off large tax increases and sweeping spending cuts in the new year appeared to resume Sunday afternoon after Republican senators withdrew their demand that a deal must include a new way of calculating inflation that would lower payments to beneficiaries programs like Social Security and slow their growth.

Senate Republicans emerged from a private meeting to say they agreed with Democrats that the request - which had temporarily brought talks to a standstill - was not appropriate for a quick deal to avert the tax increases and spending cuts starting Tuesday.

To hold the line against raising taxes on high-income households while fighting for cuts to Social Security was “not a winning hand,” Sen. John McCain, R-Ariz., said.

The concession could be a breakthrough, but Senate Republicans were still balking at an agreement Sunday, adopting a new talking point that Democrats want to raise taxes just to increase spending, not to cut the deficit. That concern appears to center on a Democratic proposal to temporarily suspend across-the-board spending cuts to military and domestic programs as talks resume on a larger deficit deal.

The demand for the new way of calculating inflation, known as “chained CPI,” issued at 7:10 p.m. Saturday, had stopped talks cold. Senate Minority Leader Mitch McConnell, a Kentucky Republican, went to the Senate floor a little after 2 p.m. Sunday to say that Republicans had made their last offer and had yet to receive a reply.

“I’m concerned about the lack of urgency. I think we all know we’re running out of time,” McConnell said.

Senate Majority Leader Harry Reid, a Nevada Democrat, responded that “at this stage, we’re not able to make a counteroffer.” He said that McConnell had negotiated in good faith but that “we’re apart on some pretty big issues.”

McConnell said he had made an emergency call to Vice President Joe Biden to get the talks started again. The two spoke twice, and the White House dispatched the president’s chief legislative negotiator, Rob Nabors, to the Capitol to meet with Senate Democrats.

Talks foundered after Republicans dug in in an effort to get the largest deficit-reduction deal they could get in the time remaining, according to numerous Republican and Democratic officials familiar with negotiations. Republicans told Democrats that they were willing to put off scheduled cuts in payments to health-care providers who treat Medicare patients, but that they wanted spending cuts elsewhere.

But it was the inflation calculation that forced Democrats away from the negotiating table.

President Barack Obama has said that in a “grand bargain” on deficit reduction, he would go along with the change, which would slow the growth of programs whose outlays rise with consumer prices, and would raise more revenue by pushing people into higher tax brackets.

Reid made clear that Democrats did not intend to include Social Security in any stopgap package. Doing so would make it hard for him to round up votes from his own party, and he has resisted touching Social Security.

“We’re not going to have any Social Security cuts,” Reid said on the floor.

The breakdown came after Obama appeared on the NBC program Meet the Press on Sunday and implored Congress to act.

“We have been talking to the Republicans ever since the election was over,” Obama said in the interview, which was taped Saturday. “They have had trouble saying yes to a number of repeated offers. Yesterday I had another meeting with the leadership, and I suggested to them if they can’t do a comprehensive package of smart deficit reductions, let’s at minimum make sure that people’s taxes don’t go up and that 2 million people don’t lose their unemployment insurance.

“And I was modestly optimistic yesterday, but we don’t yet see an agreement,” Obama said. “And now the pressure’s on Congress to produce.”

Unless Congress acts by midnight today, a broad set of tax increases and federal spending cuts known as the “fiscal cliff ” will be automatically imposed on Tuesday, affecting virtually every taxpayer and government program. The spending cuts were put in place earlier this year as draconian incentives that would force the president and lawmakers to confront the nation’s growing debt. Now, lawmakers are trying to keep them from happening, though it seemed likely that the cuts, known as sequestration, would be left for the next Congress, to be sworn in this week.

Republicans have blamed Obama for seeking to punish top earners with large tax increases and have accused him of not negotiating in good faith. They say his approach would worsen the deficit by protecting Democratic constituency groups from tax increases and benefit reductions while imposing sharp penalties on farmers and small business owners.

Wyoming’s Sen. John Barrasso, a member of the Republican leadership, said Sunday on the CNN program State of the Union that Obama was not dealing with the real issue imperiling the economy - the Democrats’ “addiction to spending.”

The president and party leaders in the House and Senate have been seeking a compromise that would protect middle-income families from the worst jolt of tax increases, but so far there is no agreement on where to draw the line. With the Bush-era tax cuts expiring, Obama and Democrats have said they want tax rates to rise on incomes more than $250,000 a year, while Republicans want a higher threshold, perhaps at $400,000.

As part of the last-minute negotiations, the lawmakers have haggled over unemployment benefits, cuts in Medicare payments to doctors, taxes on large inheritances and limits on the impact of the alternative minimum tax, which is intended to ensure the rich pay a fair share but is increasingly encroaching on the middle class.

Obama said on NBC that “if all else fails,” when a new Congress convenes on Thursday “the first bill that will be introduced on the floor will be to cut taxes on middle class families.”

Obama has said that if talks between the Senate leaders break down, he wants the Senate to schedule an up or-down vote on a narrower measure that would extend only the middle-class tax breaks and unemployment benefits. Reid said he would schedule such a vote today absent a deal.

In his comments, Obama singled out the top Republican leaders - McConnell and Boehner - for threatening to derail any deal in order to protect upper-income Americans.

Under questioning from the host of Meet the Press, David Gregory, Obama would not accept any responsibility for the impasse. He blamed Republican intransigence and political “dysfunction” in Washington, while insisting that he has offered multiple reasonable compromises.

“What is it about you, Mr. President,” Gregory asked, “that you think is so hard to say yes to?”

“That’s something you’re probably going to have to ask them,” the president responded, “because, David, you follow this stuff pretty carefully. The offers that I’ve made to them have been so fair that a lot of Democrats get mad at me.”

Obama said the priority for Republicans seemed to be “making sure that tax breaks for the wealthiest Americans are protected.”

At some point, he said, “I think what’s going to be important is that they listen to the American people.”

Meanwhile, a senior defense official said if the sequester were triggered, the Pentagon would soon begin notifying its 800,000 civilian employees that they should expect some furloughs - mandatory unpaid leave, not layoffs. It would then take some time for the furloughs to begin being implemented, said the official, who requested anonymity because the official was not authorized to discuss the internal preparations.

Another issue dividing Democrats and Republicans is the tax on inherited estates, which currently hits inheritances over $5 million at 35 percent. On Tuesday, it is scheduled to rise to 55 percent beginning with inheritances exceeding $1 million.

Sunday marked the first time since Oct. 29, 2000, that both the House and Senate are casting votes on a Sunday, according to congressional records. The House has met on 16 Sundays since World War II, according to records of the House clerk and historian’s offices.

Sen. Charles Schumer of New York, the chamber’s third-ranking Democrat, told reporters on his way into a private party meeting that he was still optimistic a deal could happen before year’s end.

“They always happen at the end; that’s how I’ve seen it happen all along,” Schumer said.

If Congress does nothing, taxes will rise in 2013 by an average of $3,446 for U.S. households, according to the nonpartisan Tax Policy Center in Washington.

Tax filing for as many as two-thirds of U.S. taxpayers could be delayed into at least late March. Defense spending would be cut, and the economy would probably enter a recession in the first half of 2013, according to the Congressional Budget Office.

The effects of the higher tax rates and federal spending cuts would accumulate over a matter of months. Congress could reverse them by acting retroactively in 2013.

Information for this article was contributed by Jonathan Weisman and John M. Broder of The New York Times; by Margaret Talev, Kathleen Hunter, Kasia Klimasinska, Heidi Przybyla, James Rowley, Richard Rubin and Roxana Tiron of Bloomberg News; and by Andrew Taylor, Alan Fram, David Espo, Robert Burns, Julie Pace, Jim Kuhnhenn and Michele Salcedo of The Associated Press.

Front Section, Pages 1 on 12/31/2012

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