UPDATED - Fiscal Cliff Issues Narrow as Obama Gives Ground on Income Level of Tax Rate Hike

December 18, 2012 01:12 AM

via a special arrangement with Informa Economics, Inc.

Negotiators know what they must do, but friction, overreaching are blocking compromise

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President Barack Obama backed away from his prior call for raising tax rates on households making more than $250,000 a year, a development that signals the two sides are nearing a final accord, which could still be several issues and untold days away from the end zone. Obama's latest counterproposal follows a weekend move by House Speaker John Boehner (R-Ohio) to raise tax rates on income over $1 million. Obama reportedly proposed allowing Bush-era tax rates to expire for households making more than $400,000 in annual income,

Several hurdles remain, including a Republican push for comprehensive entitlement spending reform, and a Democratic push to include an increase in the debt limit for two years. Boehner is said to have offered to increase the debt limit for one year in the proposal he made on Friday.

Aides to Boehner called the offer "a step in the right direction" but noted the latest proposal seeks too much tax revenue and not enough spending cuts. "We hope to continue discussions with the president so we can reach an agreement that is truly balanced and begins to solve our spending problem," said Boehner spokesman Brendan Buck.

Boehner is set to brief rank-and-file Republicans this morning on the state of negotiations, the first time the House conference will meet since the Speaker agreed to consider tax rate increases in a deficit deal last week.

As part of the offer, the president lowered the amount of tax revenue he is seeking in a deal from $1.4 trillion to $1.2 trillion, which the White House noted was midway toward the Speaker’s initial offer of $800 billion. He also agreed to accept a GOP proposal to slow Social Security growth by using a different inflation formula to calculate cost-of-living increases. But to shield his offer from Democratic lawmaker concerns, his plan would include protections for beneficiaries of the program deemed "most vulnerable."

But under GOP calculations, the White House offer contains $1.3 trillion in new taxes and about $930 billion in net spending cuts, because of a difference in how changes to the future debt interest payments are treated. Once new proposed spending for infrastructure and extended unemployment benefits that the White House wants are included, the net spending cut is $850 billion, GOP aides said.

Obama's offer reportedly calls for increased spending for infrastructure, a temporary extension of unemployment insurance benefits and a permanent extension of other tax breaks that expire at the end of the year.

Of note, Obama's latest offer did not include a Republican proposal to increase the Medicare eligibility age from 65 to 67, an idea opposed by many Democrats.

Also important is the removal of a push to extend the payroll tax cut. The change means the amount of tax paid by virtually all earners next year will increase. A temporary payroll tax cut had been in place the past two years in an effort to help boost the economy, and it expires Dec. 31.

The offer would patch the Alternative Minimum Tax, avoid an increase in the physician payment rate under Medicare and extend various other expiring tax provisions.

It would also raise the top rates on capital gains and dividends to 20 percent, from the current 15 percent, and return the estate tax to 2009 parameters. Under the Obama proposal, the estate tax would have a 45 percent top rate, with a $3.5 million exemption per person. Several Democratic senators are calling to extend the current estate tax parameters – a top rate of 35 percent and a $5.1 million exemption.

Besides spending and tax issues, there are other initiatives that could be addressed in a final agreement, including the long-delayed farm bill and nearly $61 billion in relief for Hurricane Sandy victims. A five-year farm bill could be attached to any fiscal cliff deal, providing between $23 billion and $35 billion spending cuts, which could be used to replace the scheduled $109 billion in spending cuts in the sequester that are scheduled to hit in January. The plan would eliminate at least most of the sequester. Part of the sequester could still take effect as a mechanism to enforce the agreement.

White House officials believe their new offer represents $1.2 trillion in new taxes and $1.22 trillion in spending reductions over 10 years, a ratio they say meets the balance target Obama set out during the campaign.

Legislation could be drafted, scored and cleared in as little as four days if President Barack Obama and House Speaker John Boehner (R-Ohio) can settle lingering differences. If so, that would make Dec. 27 the outside deadline for an agreement. Others say the real deadline for passing the legislation would be just before noon on Jan. 3, shortly before the 113th Congress convenes. Senate Majority Leader Harry Reid (D-Nev.) said he expects the chamber to reconvene Dec. 26 — the day after Christmas — to wrap its work for the year, which could include a deal on the fiscal cliff and a supplemental disaster relief bill. "It appears that we’re going to be coming back the day after Christmas to complete work on the fiscal cliff and a few other leftover items," Reid said in his opening remarks on the Senate floor.

Comments: The Obama counterproposal is a major development, but is not his final offer, as Boehner made clear more movement is needed to garner needed Republican votes – some Republicans note Obama's latest proposal is moving further away from the center. The key for Boehner is his House Conference because he has to get at least half of the conference to support whatever is in the final fiscal cliff package to go along with Democratic votes to clear the final package. Bottom Line: Democrats say this has the "makings of a deal" while Republican leaders say there is a "long way to go toward a more balanced approach because of the need for far more spending cuts and comprehensive entitlement reform."

House Speaker John Boehner (R-Ohio) joined other House GOP leaders this morning in commenting on President Obama's latest counteroffer regarding avoiding fiscal cliff issues. Noting Obama has proposed $1.3 trillion in new revenue, for only $850 billion in net spending reductions and that, is his opinion, "is not balanced." Talks will continue, Boehner said, "but we will now move to Plan B to protect as many American taxpayers as we can who make $1 million or less. I continue to have hope we can reach a broader agreement that will reduce spending as well as put revenue on the table." He concluded by noting a "lot of issues are on the table" but some of them do not have to be dealt with by the end of this year, including tax reform. "Most importantly, we’d lock in a process for tax reform and entitlement reform in 2013 — the two big goals we’ve talked about for years," Boehner said in prepared remarks. Boehner is demanding a 1-to-1 ratio between tax hikes and spending cuts, and Republicans argue the latest proposal from Obama does not meet that demand, partly because of Obama's demand for new infrastructure spending and an extension of unemployment benefits. Boehner said a balanced plan would be $1 trillion in revenue with $1 trillion in spending reductions. Boehner also signaled that last Friday’s deadly shooting at an elementary school in Connecticut might have helped nudge the talks along. "It’s not a time to put Americans through more stress," he said.


The White House rejected Boehner's Plan B approach and the Senate would not likely even consider it, even if were to pass the House chamber later this week.


NOTE: This column is copyrighted material, therefore reproduction or retransmission is prohibited under U.S. copyright laws.






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