GOP: Will drop tax hard line

LITTLE ROCK — Senior Republicans say they would be forced to retreat on taxes if President Barack Obama wins a second term in November, clearing the biggest obstacle to a deal with Democrats to defuse a year-end budget bomb that threatens to rock the U.S. economy.

Republicans have long resisted tax increases of any kind. But taxes are a big battleground in the campaign between Obama and Republican Mitt Romney, Capitol Hill veterans say, and the victor will be able to claim a mandate for his policies.

“This is a referendum on taxes,” said Rep. Tom Cole, R-Okla., a senior member of the House Budget Committee. “If the president wins re-election, taxes are going up” for the nation’s wealthiest households, and “there’s not a lot we can do about that.”

With Election Day still more than six weeks away and Obama holding a thin lead innational polls, Republicans say they are not conceding that an Obama victory is the likely outcome. But they are beginning to plan for that possibility. Congressional leaders expect to leave town today and will not return until mid-November, when lawmakers will have little time to head off $500 billion in automatic tax increases and spending cuts set to hit Jan. 2.

If Romney wins the White House, Republicans say, their strategy is clear: They would push to maintain current tax rates through 2013, giving the new president time to draft his own blueprint for overhauling the tax code and taming the $16 trillion national debt.

But if Obama wins, the GOP would have no leverage - political or procedural - to force him to abandon his pledge to raise taxes on family incomes that top $250,000, according to senior Republicans in the House and Senate. So they are beginning to contemplate the contours of a compromise that would let taxes go up inexchange for Democratic concessions on GOP priorities.

At the very least, that would mean protecting the Pentagon from the budget ax, which is set to whack $55 billion out of national security accounts next year. But it could also mean big changes in Medicare, which many Republicans said could quickly become the new front in the partisan battle over the budget.

“I hope, obviously, the status quo doesn’t prevail” on Nov. 6. “But if things stay as they are, and all the players are generally the same, .... finding a responsible reform for Medicare is the secret to unleashing very productive talks that would put in place a balanced solution to our fiscal problems,” said Sen.Bob Corker, R-Tenn. “If you deal with the Medicare issue, then Republicans are far more open to looking at revenues.”

Difficult details would have to be hammered out. And any compromise would face head winds in the House, where a large bloc of GOP freshmen opposed new taxes during a messy fight to raise the federal debt limit last summer. Many say they are still not ready to agree to higher taxes and that they will press to maintain tax rates for families at all income levels no matter who wins the White House.

There’s more fertile ground in the Senate, where even some ardent conservatives say Republicans may have no choice but to throw in the towel on taxes if they want to persuade Democrats to spare the Pentagon budget.

“We’re not going to save our defense unless we go along with the president’s wishes to raise taxes on small business,” said Sen. Jim DeMint, R-S.C., a leader of the Tea Party movement. “It’s not a good choice. I would never support it. ... [But] there are enough Republicans, I think, who are so afraid of defense cuts that they would probably give in.”

After nearly two years of gridlock, the anticipation of movement on the debt has touched off a frenzy of hopeful activity. The so-called Gangof Six senators who have long labored to take a bipartisan debt-reduction plan to a vote are back at work with an expanded membership that includes Sens. Lamar Alexander, R-Tenn., and Michael Bennet, D-Colo. Meanwhile, Corker is one of several senators circulating his own proposal to restrain spending on health and retirement programs, overhaul the tax code and significantly reduce future borrowing.

Without congressional action, the nation faces the largest dose of fiscal austerity in more than 40 years.

Administration officials declined to comment on planning for the fiscal cliff. But key Democrats and others who have met recently with White House officials say Obama is likely to act fast to propose such a plan on his own if he wins in November.