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Fiscal cliff update: Congress could now be close to a new tax agreement


From Bloomberg:

A few dozen Republicans have joined a bipartisan call to break the impasse between President Barack Obama and House Speaker John Boehner over taxes for the highest- earning Americans.

The Republicans signed a letter calling for exploration of “all options” on taxes and entitlement programs, a signal that some rank-and-file members are ready to bargain.

One of the petition leaders, Representative Mike Simpson of Idaho, says he could accept higher rates for married couples earning more than $500,000 a year, in exchange for an overhaul of spending on entitlements such as Medicare.

Separately, Representative Kay Granger of Texas is endorsing Oklahoma Republican Tom Cole’s call to extend all tax cuts for middle-class earners as “just the right thing to do.”

What unifies these lawmakers is a recognition that Obama’s re-election has strengthened his hand in negotiations aimed at averting more than $600 billion in automatic tax increases and spending cuts set to take effect in January. The letter’s approximately 80 signers are half-Republican, half-Democratic, according to Simpson spokeswoman Nikki Watts.

“It’s pretty obvious Obama won the election, and he promised he was going to raise taxes on the wealthiest,” Simpson said in an interview. “What Republicans said is, ‘We’ve got to have entitlement reform.'”

While it may be an unpalatable trade for both sides, he said, “There’s enough sane people left to get it done.”

No Meetings

There have been no meetings among congressional and White House staff or principals in the last 24 hours, a congressional leadership aide said. White House press secretary Jay Carney refused to say whether there have been discussions between the administration and Congress.

“I have no conversations to report, and I can tell you that I’m not going to report out to you, blow-by-blow” details of any conversations between the administration and members of Congress, Carney said at the daily White House briefing. “The president is engaged, his team is engaged.”

The odds are more than 50 percent that Congress and the president will reach a deal before Jan. 1, if Republicans agree to let the top tax rate rise above the current 35 percent, Maryland Representative Chris Van Hollen said today at a Bloomberg Government panel in Washington.

“If that doesn’t come true, it’s less than 50 percent,” Van Hollen said. At the panel, Senator Mark Warner, a Virginia Democrat, and Senator Bob Corker, a Tennessee Republican, said they also think a budget deal will be reached this month.

Stocks, Bonds

Stocks rose after a two-day drop in the Standard & Poor’s 500 Index. The S&P 500 rose 0.5 percent to 1,414.46 at 1:10 p.m. New York time, after falling as much as 0.6 percent earlier. The Dow Jones Industrial Average added 130.01 points, or 1 percent, to 13,081.79. Treasury 10-year yields fell one basis point to 1.59 percent at 12:35 p.m. New York time, according to Bloomberg Bond Trader data.

A trade-off of higher taxes for entitlement spending cuts would require Boehner, an Ohio Republican, to persuade more than 100 of his majority party members to join House Democrats in approving a deal.

Representative Steve LaTourette of Ohio said Boehner could get the 218 votes needed to send a tax increase to the Democratic-run Senate if about 120 House Democrats “buy in” to entitlement cuts, such as raising the eligibility age for Medicare or adjusting the annual Social Security cost-of-living adjustment.

Over the Line

“You could get enough Republicans to bring it over the line,” he said.

The sentiments of LaTourette, Simpson and allies suggest a path around the primary obstacle to a deal. It includes Obama’s insistence on raising tax rates for couples earning more than $250,000 a year with Boehner’s approach of curbing tax deductions.

Obama, in an interview yesterday with Bloomberg Television, said he is “flexible,” so long as tax rates are increased.

Aides to Boehner and House Majority Whip Eric Cantor of Virginia are playing down the number of Republicans willing to defect on tax rates. Publicly, the speaker has given no indication he’ll change his position. Boehner spokesman Michael Steel didn’t immediately comment.

Front Crumbling

The effort shows that Republicans’ once-united front on income tax increases is crumbling since the Nov. 6 election put Obama back in the White House and increased Democratic ranks in the Senate and House.

Last week, Cole was the first high-profile Republican to say his party should lock in the George W. Bush-era income tax cuts for 98 percent of Americans by the end of the year and allow them to expire for the top 2 percent of earners. Other Republicans began nodding in agreement.

“I would gladly accept some rate increase if some spending reduction was locked in, but the White House is not addressing any of that,” said California Representative Brian Bilbray, who is retiring.

Republicans including Peter King of New York and Scott Rigell of Virginia have said they would violate a pledge against raising taxes.

“There are probably dozens of other Tom Coles in the House who just don’t feel free to speak their mind,” New York Senator Chuck Schumer, a Democrat, told reporters today.

Charitable Contributions

The administration and Democrats say tax rate increases are necessary because limits on tax deductions wouldn’t raise enough revenue, especially if they are designed to avoid harming charitable contributions and won’t affect 98 percent of taxpayers.

Simpson said a potential tax compromise may include either raising Obama’s $250,000 threshold to $500,000 or $1 million, or raising rates on top earners short of the 39.6 percent level during President Bill Clinton’s administration. That could be combined with ending or capping some deductions and credits that both parties could agree to, he said.

Gerry Connolly, a Virginia Democrat, said many Democrats would support raising to $500,000 the threshold for ending the Bush-era income tax rates. Connolly said he views Obama’s demand for tax increases on those making $250,000 and above as an opening offer.

While the new Republican flexibility on tax rates may improve the outlook for a deal, it would require Democrats to bend on some Republican demands to trim Medicare and Medicaid.

Current Seniors

“Republicans are looking for any sort of compromise” and are not intending to affect “current seniors or those coming into the system shortly,” said Republican Robert Dold of Illinois.

Simpson suggested raising the eligibility age for Medicare beneficiaries, trimming benefits or increasing co-payments for wealthier recipients.

House Democratic Whip Steny Hoyer said yesterday that proposals to raise the eligibility age from 65 to 67 and other entitlement changes “clearly are on the table.”

Even Republicans from solidly conservative states are signaling openness to a tax rate increase in exchange for overhauling entitlements.

“There’s obviously political merits” to compromising on rates, said Representative Bill Cassidy of Louisiana. “My answer to it entirely depends upon what the president offers” on entitlements, he said.

Eligibility Age

“I know we have to raise revenue,” Republican Senator Tom Coburn of Oklahoma said on MSNBC today. “I don’t really care which way we do it. Actually, I would rather see the rates go up than do it the other way because it gives us a greater chance to reform the tax code and broaden the base in the future.”

In their offer this week, House Republican leaders sought to increase the Medicare eligibility age and to use an alternative yardstick for determining inflation, which would cut future cost-of-living adjustments for Social Security. Both were part of a deal that Obama and Boehner were discussing which imploded last year.

Obama, in his Bloomberg interview, didn’t rule out any of these options. “I don’t expect Republicans to agree to any plan where they’re just betting on the come that entitlement reform will happen,” he said.

Cole, the Oklahoma Republican who created a stir in his party by calling for the tax cuts to expire for top earners, yesterday said the two parties are within striking distance of an agreement. “I don’t think they’re as far apart as it seems,” he told reporters at the Capitol.

To contact the reporter on this story: Heidi Przybyla in Washington athprzybyla@bloomberg.net.

To contact the editor responsible for this story: Jodi Schneider atjschneider50@bloomberg.net.

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