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Grand Bargain Shrinks as Congress Nears U.S. Budget Deadline

By Derek Wallbank
December 26, 2012 2:16 PM EST 186 Comments
House Speaker John Boehner
House Speaker John Boehner

The deal that seems possible to fix the U.S. budget is getting smaller and smaller.

Congress returns tomorrow amid calls for action in the Senate, five days before a deadline that would trigger more than $600 billion in tax increases and spending cuts that could cause a U.S. recession,.

The politics of progress in that chamber are easier than in the Republican-controlled House of Representatives, which balked last week at Speaker John Boehner’s plan for tax increases only on those with income above $1 million. Still, the House would have to sign off on any Senate plan. Boehner, an Ohio Republican, and President Barack Obama have been unable to agree on the tax-rate increase on top earners Obama wants or the cuts to entitlement programs that Boehner sought, complicating the chances of getting a package done.

“At this point, all they’re looking for is a fig leaf,” said Stan Collender, a former staff member of the House Ways and Means Committee and the House and Senate Budget committees who is now at Qorvis Communications in Washington. “There’s no grand bargain. There never was.”

Small Deal

The Senate is run by Democrats, and some Republican members, including Kay Bailey Hutchison of Texas, have said that they would favor a small deal on parts of what the president has sought to avoid raising taxes on the less affluent.

The trouble is that Senate Majority Leader Harry Reid, a Nevada Democrat, and Minority Leader Mitch McConnell, a Kentucky Republican, need to come up with something that also can get through the House, which has balked at any tax increases. Senate Republicans don’t want to be on the record supporting higher taxes unless they know the House also would pass it.

“There’s still a chance for them to get a deal,” said Ron Bonjean, a Republican strategist who once served as a spokesman for former House Speaker Dennis Hastert of Illinois and former Senate Majority Leader Trent Lott of Mississippi. “It grows more unlikely by the day, and there’s not a lot of days left.”

Obama and Boehner haven’t spoken since the president flew to Hawaii on Dec. 21, according to a Republican aide who requested anonymity when discussing the negotiations. Obama plans to return to Washington today, while his family will remain in Hawaii, the White House said yesterday.

House Plans

The House will hold a pro-forma session tomorrow. House leaders told rank-and-file lawmakers that they would receive a 48-hour notice before being called back to Washington. Leaders haven’t yet given that notice and are still discussing the schedule, according to a leadership aide who requested anonymity when discussing the leaders’ plans.

Even if the leaders decided today to call back members, many wouldn’t be back to the Capitol until Dec. 28.

Bonjean put the probability of no deal at 75 percent. Still, he said there’s a chance for one because Obama and Republican leaders want to avoid the “fiscal cliff” -- a term coined by Federal Reserve Chairman Ben S. Bernanke in testimony before the House Financial Services Committee in February. Tax cuts signed into law by President George W. Bush and extended by Obama are scheduled to expire Jan. 1, and automatic spending cuts for government programs are scheduled to start next month, creating the so-called cliff.

The S&P 500 (SPX) declined 0.5 percent to 1,419.86 at 1:37 p.m. in New York. The Dow Jones Industrial Average (INDU) dropped 35.98 points, or 0.3 percent, to 13,103.10. The yield on the benchmark 10-year Treasury bond was 1.76 percent at 1:38 p.m. in New York, down two basis points, or 0.02 percentage points, according to Bloomberg Bond Trader prices.

Interim Bill

Before going on vacation with his family, Obama urged leaders of both parties to put together an interim bill to keep taxes from rising on middle- and lower-income Americans as the two sides work on a more comprehensive package.

Senate Democratic leaders have said they won’t take action on a fallback plan unless they have assurances from Boehner that he will bring it up in the House and let it pass with a combination of Democratic and Republican votes, and from McConnell that Senate Republicans won’t filibuster it.

“A comprehensive solution to the looming fiscal cliff will need to be a bipartisan solution,” Reid said on the Senate floor Dec. 21. “No comprehensive agreement can pass either chamber without both Democrats and Republican votes.”

Deal Possibility

Senator Charles Schumer of New York, the chamber’s third- ranking Democrat, told reporters Dec. 21 that “the key to this is the House.” McConnell wouldn’t “want to have his members put their necks on the line for a deal that may not pass the House,” he said.

Schumer and Reid called on Boehner to resume talks with Obama. Failing to reach a budget deal would push the U.S. into recession for the first half of 2013, according to the nonpartisan Congressional Budget Office.

“At this point there’s zero percent chance of a big deal and maybe a 10 percent chance of a small deal before Jan. 1,” Collender said. He has predicted a no-deal scenario since before the Memorial Day holiday in May, and said the past two weeks of inaction reinforced his projection.

At this point, Collender said, whether the Senate moves first won’t matter.

“Nothing will move House Republicans if they don’t feel like getting moved,” he said. “They’ve never been swayed by the Senate before.”

Democratic Support

The remaining option for averting the cliff, he said, would be if Boehner risks his House speakership to put to the floor a tax deal that would get a majority of Democrats to support it and few -- perhaps less than 50 -- Republicans.

“The Republican caucus would never forgive him,” he said. “The statesmanlike thing to do would be to say, ‘I’m the speaker of the House, not the head of the Republican Party.’ That is the equivalent of never running for speaker again.”

Boehner, first elected speaker in January 2011, was selected by his Republican conference as its nominee to continue in the post in the new Congress that convenes next week. He needs an absolute majority of those present and voting on Jan. 3 in the 425-seat House to be re-elected. Republicans will hold 234 seats to begin the 113th Congress in January. If re-elected, Boehner will have more freedom to cut a deal, Collender said.

Edging Closer

Until Dec. 17, Obama and Boehner had been edging closer to a deal that included $1 trillion each in tax increases and spending cuts. Boehner had put tax-rate increases on the table for income above $1 million a year, infuriating some lawmakers backed by anti-tax Tea Party groups.

That was the proposal he pulled from the House floor on Dec. 20 rather than see it defeated by his own caucus members.

Both Obama and Boehner have offered concessions in talks, in person and by telephone, since Dec. 5.

The president initially sought $1.6 trillion in new revenue, including a return to pre-Bush income tax rates for annual household income over $250,000 a year. The speaker first rejected any increase in tax rates, instead offering $800 billion in revenue by limiting unspecified exemptions.

After Boehner proposed raising taxes for households earning more than $1 million a year, Obama countered with a proposal to raise taxes on more than $400,000 of income.

Obama also has agreed to accept cuts in entitlement spending on programs such as Medicare, while Boehner has maintained that new taxes and spending cuts must be balanced on a one-to-one basis.

In sum, the two have approached the outlines of a plan that would raise about $1 trillion in tax revenue and cut about $1 trillion in spending.

To contact the reporter on this story: Derek Wallbank in Washington at dwallbank@bloomberg.net

To contact the editor responsible for this story: Cesca Antonelli at fantonelli@bloomberg.net

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