Bloomberg News

Lawmakers Open Rhetorical Space for Budget Deal in Middle

December 10, 2012

U.S. Leaders Make Rhetorical Room for Compromise Budget Deal

House Speaker John Boehner, a Republican from Ohio, second right, speaks while House Minority Leader Nancy Pelosi, a Democrat from California, left, Harry Reid, Democratic Senator from Nevada, second left, and Mitch McConnell, Republican Senator from Kentucky, right, listen after meeting with President Barack Obama at the White House on Nov. 16, 2012. Photographer: Joshua Roberts/Bloomberg

Lawmakers from both parties are leaving rhetorical room for a split-the-difference agreement with President Barack Obama on a U.S. budget deal.

The president and House Speaker John Boehner met one-on-one yesterday at the White House, with representatives for the two leaders offering no details of the negotiations and issuing identical statements afterward that “the lines of communication remain open.”

Staff members for the president and Boehner held a follow- up meeting yesterday and made no progress, said a Republican aide familiar with the talks.

While Obama and the White House’s bargaining team insist on raising tax rates for the nation’s highest earners, they aren’t demanding the precise 39.6 percent top rate spelled out in the president’s budget. In the past few days, Republican congressional leaders have reiterated their opposition to rate increases without explicitly ruling them out.

Obama Meets with Boehner Privately at White House

It’s possible to chart an arithmetic compromise in the negotiations aimed at averting automatic tax increases and spending cuts set to take effect Jan. 1. It could contain about $1.2 trillion in new revenue and $1 trillion in spending cuts, midway between the two sides’ initial offers.

“We’ve set the parameters,” Representative Dennis Ross, a Florida Republican, told reporters last week. “The president had his offer. We’ve had our counterproposal. And somewhere within these parameters, I think, an offer is going to be considered.”

Middle Ground

The top income tax rate could be set at 37 percent or 38 percent, between the current 35 percent and the 39.6 percent rate that will return in 2013 if Congress does nothing. Both parties could accept down payments of revenue and spending cuts in 2013 and overhaul the tax code and entitlement programs next year.

Representative Jim McDermott, a Washington Democrat, said today that Boehner needs to talk with House Minority Leader Nancy Pelosi, a California Democrat, about what kind of bill can gain enough Democratic votes to pass.

“Unless that goes on, you’re not going to get a full package here,” McDermott said at an event in Washington sponsored by Politico.

Representative Xavier Becerra of California, a member of the Democratic leadership, said he didn’t know what progress, if any, Obama and Boehner made yesterday. “The more that they stay in touch with each other, the more a chance for movement,” he said.

Stocks, Bonds

U.S. stocks rose today. The Standard & Poor’s 500 Index (SPX) rose 0.1 percent at to 1,418.72 at 1:41 p.m. New York time. The Dow Jones Industrial Average added 18.82 points, or 0.1 percent, to 13,173.95 today. Treasuries erased gains, as 30-year bond yields were little changed at 2.81 percent at 12:45 p.m. in New York, according to Bloomberg Bond Trader prices.

Getting a split-the-difference deal remains politically difficult. Each side is waiting for the other to make the next offer, and a polarized Congress includes lawmakers on both sides who would reject a deal that violates their party’s principles. Some Republicans would reject tax increases and some Democrats would balk at cuts in entitlements such as Medicare.

‘Too Soon’

“If we had a deal on Dec. 10, both bases would say, ‘You guys are nuts, you gave too soon, you gave too much.’ It’s not surprising that it hasn’t come together yet,” Peter Orszag, Obama’s first director of the Office of Management and Budget, said today on MSNBC’s “Morning Joe” program.

“You can see a deal coming together on taxes, some increase on marginal tax rates, not to 39.6 percent, some reduction in tax expenditures,” said Orszag, vice chairman of global banking at Citigroup Inc. and a Bloomberg View columnist. The best approach, he said, “is to try and do as much up front as possible. The more that’s kicked to a second-stage process, with promises, detail TBD, the less credible it is.”

Bipartisan votes in the Republican-run House of Representatives and Democratic-controlled Senate probably will be needed to pass any Obama-Boehner deal, giving the minorities in both chambers power in the negotiations. Obama met last week with Pelosi.

No Staff

Obama’s meeting with Boehner yesterday was the first known session since the president invited congressional leaders to the White House on Nov. 16, though the president and the speaker have spoken by telephone since then. They met privately, with no staffers attending, according to a congressional aide. The negotiations have narrowed to the two leaders of their parties.

Lawmakers face additional choices about also addressing the $16.4 trillion federal debt ceiling and including economic- stimulus provisions that Obama is seeking.

White House press secretary Jay Carney refused to characterize the talks between Obama and Boehner, saying it’s in the “best interests” of both sides not to negotiate in public. Briefing reporters traveling with Obama to an event in Michigan, Carney said the White House is still waiting for details from Republicans on their revenue proposals.

Raising Revenue

Boehner has insisted that any new revenue come from limiting tax exemptions and has proposed $800 billion, without offering any specifics. The White House maintains that the government can’t raise that much money without affecting middle- class taxpayers, hurting charities or avoiding a rate increase for the highest earners. Obama has proposed $1.6 trillion in new revenue, including tax increases for the top earners.

Boehner, the chief Republican negotiator, didn’t rule out a smaller rate increase than what Obama wants -- if it protects small businesses -- when asked about it by reporters on Dec. 7. Boehner, who controls which bills come up for votes in the House, later issued a statement reiterating his opposition to rate increases without explicitly vowing to block one.

“I oppose tax rate increases because tax rate increases cost American jobs,” the Ohio Republican said. “That has not changed, and will not change.”

In Flux

In an interview broadcast this morning on CBS’s “This Morning” program, Jeff Immelt, chairman and chief executive officer of General Electric Co., said “we’ve got to get this done now” because “the millions of people who work for us, their lives are in flux.”

“Everybody knows we need revenue,” said Immelt, head of the White House council on jobs and competitiveness. Boehner “has got to take the heat, and I trust that he can do it. We trust Speaker Boehner to do it, and he shouldn’t spend one minute using political capital to keep my rates low.”

On the question of spending cuts, Senator Richard Durbin, an Illinois Democrat, expressed continued openness for means- testing Medicare benefits.

“Medicare will run out of money in 12 years,” Durbin, the second-ranking Senate Democrat, said on NBC’s “Meet the Press” yesterday. A solution is needed, he said, while finding a way to “keep this a sound program and a solvent program.”

Obama’s vagueness on entitlement spending cuts has frustrated Republicans while keeping his options open.

“I’m prepared to make some tough decisions on some of these issues,” he said in a Dec. 4 Bloomberg Television interview, without detailing what he would accept.

The final result will depend in part on lawmakers’ leverage and beliefs about who will get blamed if talks fail.

Recession Prediction

The Congressional Budget Office projects that the U.S. economy would enter a recession in the first half of 2013 if no action were taken, and, should that occur, both parties are poised to pin blame on the other’s intransigence.

“We cannot allow their reckless position to drive this economy into recession, a recession which the Republicans will own,” Durbin said of Boehner’s party.

Even if Obama and Boehner can’t find a comprehensive plan by Dec. 31, Congress could turn to a fallback deal that makes minimal changes that enjoy bipartisan agreement.

For example, unless Congress acts, the alternative minimum tax for the 2012 tax year will expand to 32 million households from 4 million, costing taxpayers $92 billion in early 2013 and delaying tax filing for more than 60 million households until at least late March.

Tax Cuts

Alternatively, Republicans could pass a bill that would extend the expiring tax cuts for everyone except the highest earners, giving Democrats a temporary victory and using the impending debt ceiling as leverage in early 2013.

Senator Bob Corker, a Tennessee Republican, became the latest lawmaker to suggest that strategy yesterday.

“The focus then shifts to entitlements and maybe it puts us in a place where we actually can do something that really saves the nation,” he said on “Fox News Sunday.”

Time is running short, with this week important because of the days needed to turn a potential Obama-Boehner agreement into legislative language, sell it to lawmakers and pass it.

In 2010, Obama and Republicans reached a conceptual agreement to extend the George W. Bush-era tax cuts for two years on Dec. 6. The president signed it into law Dec. 17.

To contact the reporter on this story: Richard Rubin in Washington at rrubin12@bloomberg.net

To contact the editor responsible for this story: Jodi Schneider at jschneider50@bloomberg.net


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