Bloomberg News

Lawmakers to Hold Weekend Talks on Averting Budget Change

December 29, 2012

U.S. lawmakers entered a weekend of budget negotiations in a final effort to prevent at least some of more than $600 billion in tax increases and spending cuts from taking effect in January.

Senate Majority Leader Harry Reid and Minority Leader Mitch McConnell said they’ll try to reach a deal by tomorrow, likely focusing on a relatively narrow range of issues rather than the full list of tax and spending changes. They face the same partisan mistrust and divides on fiscal policy that have prevented a budget deal for more than two years -- compounded by the Dec. 31 deadline to thwart the tax increases and spending reductions, as well as the Jan. 3 start of the next Congress.

“The hour for immediate action is here,” President Barack Obama said yesterday at the White House, declaring himself “modestly optimistic” about a deal while complaining about Congress’s tendency to wait until the last minute to act.

“The American people are not going to have any patience for a politically self-inflicted wound to our economy,” he said.

Both sides are positioning themselves to embrace a bipartisan deal as a welcome and rare accord in a polarized government. They’re also trying to demonstrate willingness to compromise so they can blame the other party if talks collapse and the so-called fiscal cliff occurs.

Market Reaction

The Standard & Poor’s 500 Index fell for a fifth day yesterday, by 1.1 percent to 1,402.45 at 4 p.m. in New York. The benchmark Treasury 10-year yield declined four basis points, or 0.04 percentage point, to 1.7 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices.

Beyond extension of the tax cuts set to expire and expanded unemployment insurance, Reid and McConnell will consider provisions to prevent a reduction in Medicare payments to doctors, avoid some automatic spending cuts and prevent a scheduled increase in milk prices, said a person familiar with the talks who requested anonymity to discuss the private conversations.

Any agreement probably won’t raise the federal debt limit, which is almost at its ceiling, the person said.

Income Threshold

During a meeting with congressional leaders, Obama left open the possibility of setting the threshold where tax increases would start at $400,000 in annual income instead of the $250,000 he prefers, said a Republican aide who was briefed on the talks and requested anonymity.

The automatic spending reductions aren’t likely to be addressed in an immediate agreement, the aide said. About half of the spending cuts would affect defense programs, and defense contractors including Bethesda, Maryland-based Lockheed Martin Corp. (LMT:US) have been lobbying to prevent them.

In his weekly address today, Obama said leaders in Congress are working to prevent a middle-class tax increase. “We may be able to reach an agreement that can pass both houses in time,” he said.

“For the first time, you’re seeing an opportunity for a real result rather than the phony-baloney acts that they’ve been engaged in,” Senator John McCain, an Arizona Republican, said yesterday. “Republicans know that they’re losing the PR battle but the president knows that history will judge him.”

Senate Veterans

Reid and McConnell participated in an afternoon meeting yesterday at the White House with Obama, House Speaker John Boehner and House Minority Leader Nancy Pelosi. Reid, 73, and McConnell, 70, are veteran senators who have worked side by side in their current roles for almost six years, sparring in public and negotiating in private.

If Senate leaders can’t agree on a bill, Obama said he will ask Reid to hold a vote on a plan he outlined Dec. 21 that would let taxes rise on annual household income exceeding $250,000.

The president’s proposal to raise taxes on the top two percent of Americans “would only fund the government for eight days,” Senator Roy Blunt, a Republican from Missouri, said today in the weekly Republican address. “What does the president propose we do for the other 357 days of the year?”

If Congress doesn’t act, taxes would rise by more than $3,400 per household, automatic spending cuts would start taking effect and expanded unemployment benefits would lapse. If there is no resolution soon, the economy would likely go into recession in the first half of 2013, according to the Congressional Budget Office.

Reid, a Nevada Democrat, and McConnell, a Kentucky Republican, haven’t agreed on details, said a Senate Democratic aide who spoke on condition of anonymity yesterday to discuss the talks.

Reid’s Bill

Reid said in a statement yesterday that he was readying a bill for a vote by Dec. 31 that would extend expiring tax cuts on income up to $250,000 and other provisions.

“In the next 24 hours, I look forward to hearing any good- faith proposals Senator McConnell has for altering this bill,” Reid said in a statement after 6 p.m. in Washington yesterday.

Senate Republicans, including John Cornyn of Texas, said they were resigned to their inability to prevent higher tax rates for some top earners.

“We have to bow to the inevitable, which is we are in the minority in the Senate, and that’s likely to happen no matter what we do,” Cornyn said in an interview.

Senator Kelly Ayotte, a New Hampshire Republican, said she could accept a $500,000 threshold for higher tax rates.

“I want to be able to save as many people as possible from a tax increase,” she said.

McConnell, who said yesterday that he was “optimistic” about an agreement, won’t agree to something that Boehner and the House can’t support, said Senator Jon Kyl of Arizona, the second-ranking Senate Republican.

‘Get a Result’

“Our effort here is to try to get a result,” Kyl told reporters. “If you know the House isn’t going to do something, then why go through the charade?”

A Reid-McConnell deal would shift pressure to Boehner, who would probably need to rely on Democratic votes to pass a bill that would allow some tax rates to go up.

Boehner and the House could accept a Senate-passed bill or change it and send it back to the Senate. The House and Senate are scheduled to return to Washington tomorrow for an unusual Sunday session. It would be the first time since Oct. 29, 2000 when both the House and Senate are casting votes on a Sunday, according to congressional records.

“All he can recommend is for the Senate to find a position and send it to us and he’ll be happy to see how it flies,” Representative Lynn Jenkins of Kansas, a member of the incoming Republican leadership, said in an interview.

Tax Rates

Tax policy remains the most substantial divide between the two parties. Any deal between Reid and McConnell would have to address tax rates on ordinary income, capital gains, dividends and estates, all of which are scheduled to increase on Jan. 1, Kyl said.

Republicans have resisted rate increases for any income level, maintaining that they would hurt the economy and particularly businesses that pay their taxes on their owners’ individual returns. On Dec. 20, because of opposition from his own party, Boehner scrapped a plan that would have let taxes increase on incomes above $1 million.

Any rate increase would hurt small businesses, Kyl said.

“I’m not going to predict what we would or wouldn’t agree to,” he said.

Narrowing Scope

As the deadline nears, the potential scope of a deal is getting narrower. Obama and Boehner had spent several weeks negotiating toward an agreement that might have included cuts in entitlement programs such as Medicare, a debt-ceiling increase, permanent extensions of miscellaneous tax breaks and language to prevent an expansion of the alternative minimum tax.

The absence of a debt ceiling agreement would make the limit on U.S. borrowing authority the next major event forcing a fiscal debate. Republicans plan to use it as leverage to force Obama to accept spending cuts.

The government will hit the $16.4 trillion limit Dec. 31, and the Treasury Department will begin using so-called extraordinary measures to finance about $200 billion of deficits into 2013. That would typically be enough to last about two months; Treasury hasn’t provided a specific estimate on when those measures would run out.

To contact the reporters on this story: Richard Rubin in Washington at rrubin12@bloomberg.net; Margaret Talev in Washington at mtalev@bloomberg.net

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


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