WASHINGTON — Senate leaders are closing in on a path for dealing with the “fiscal cliff” facing the country in January, opting to try to use a postelection session of Congress to reach agreement on a comprehensive deficit reduction deal rather than a short-term solution.
Senate Democrats and Republicans remain far apart on the details, and House Republicans continue to resist any discussion of tax increases.
But lawmakers and aides say that a bipartisan group of senators is coalescing around an ambitious three-step process to avert a series of automatic tax increases and deep spending cuts.
First, senators would come to an agreement on a deficit reduction target — likely to be around $4 trillion over 10 years — to be reached through revenue raised by an overhaul of the tax code, savings from changes to social programs like Medicare and Social Security, and cuts to federal programs.
Once the framework is approved, lawmakers would vote on expedited instructions to relevant congressional committees to draft the details over six months to a year.
If those efforts failed, another plan would take effect, probably a close derivative of the proposal by President Barack Obama’s fiscal commission led by Erskine Bowles, the Clinton White House chief of staff, and former Sen. Alan Simpson of Wyoming, a Republican. Those recommendations included changes to Social Security, broad cuts in federal programs and actions that would lower tax rates overall but eliminate or pare enough deductions and credits to yield as much as $2 trillion in additional revenue.
Finally, they would vote to put off the automatic spending cuts, known as sequestration, and tax increases scheduled to hit all at once in January — but with some deficit reduction down payment to signal how serious Congress is.
Obama has said he would not allow Congress to simply pass a new law to override the $1 trillion in automatic cuts agreed to in the Budget Control Act of 2011, but senators said they believed the White House would go along with a deal that locks in as much as four times those savings in exchange for canceling the automatic cuts.
With both sides awaiting the outcome of the election, negotiators will not even try to determine how much money would come from the three components until after the voting, when, presumably, the victorious side would emerge with new leverage.
“A lot of what happens and when it happens depends on the outcome of the election,” said Sen. Mitch McConnell of Kentucky, the Republican leader.
House Republicans, favored to retain control regardless of the presidential and Senate results, have not been part of the Senate talks so far and could be difficult to sway to back a package with significant new revenue even if it wins bipartisan Senate support.
Democratic leaders are already signaling a major stumbling block: They will accept no deal that extends Bush-era tax cuts for the rich, even for six months.
“President Obama has clearly stated he will not extend the Bush tax cuts for millionaires and billionaires, and I fully support his position,” Sen. Harry Reid of Nevada, the majority leader, said in a statement. “Americans are sick and tired of simply kicking the can down the road and avoiding our nation’s financial issues.”
Other senators, like Lindsey Graham, R-S.C., have counseled a more incremental approach to head off mandatory deep military cuts next year. Sen. Richard Durbin of Illinois, the second-ranking Democrat, had suggested finding enough savings for a six-month delay on taxes and cuts to give negotiators more time.
But McConnell compared the government to a ship sinking under the weight of Medicare and Social Security and said that temporarily holding off the automatic budget cuts and tax increases would not avert a disaster.
“Even if we rearrange the chairs, fix the tax thing, fix the sequester, the ship’s still going down,” he said in an interview. “I want to deal with it altogether. The next best opportunity is the end of the year.”
With their party leaders’ encouragement, Sens. Michael Bennet, D-Colo., and Lamar Alexander, R-Tenn., have begun talks on legislative language to lock a deficit reduction framework into law.
And pressure for a deal continues to grow. Monday, the nonpartisan Tax Policy Center released a study estimating that if nothing is done, the expiration of all the Bush-era tax cuts would raise taxes by more than $500 billion next year alone, an average increase of $3,500 per household. Middle-income families, it said, would see taxes rise by an average of almost $2,000.
Sen. Tom Udall, D-N.M., said figures like those and forecasts anticipating a recession if nothing is done have prompted some consideration for postponing any tax increases or spending cuts for a year. But he said lawmakers want to lock in action on the deficit now.
“You have to have the framework of a plan,” he said. “We need to find something that’s going to make us come to the table and put our fiscal house in order.”
The two parties will have only weeks to reach an agreement between Election Day and Dec. 31, and they remain far apart on some fundamental issues besides tax cuts for the wealthy. House Speaker John Boehner of Ohio says he will not accept any deal that raises tax rates or “decouples” the Bush-era tax rates by extending some but allowing others to expire.
Senators have also failed to agree on a mechanism to enforce a deficit reduction plan. Durbin has suggested that if Congress cannot agree on changes to the tax code, entitlements and spending in six months, the automatic spending cuts and tax increases should go into effect.
But the bipartisan group of senators says that medicine has already proved too tough to swallow. Instead, the backstop should be an acceptable deficit reduction program like Simpson-Bowles.
“The idea is to put in place an end product upfront that is already fairly agreeable,” said a Senate official familiar with the plans. “You’d basically be giving Congress six months to improve upon it.”
After so many false starts, even those involved in the talks are reluctant to express much optimism.
McConnell and other Republicans said only the president could make a deal happen.
“I encourage all these discussions,” he said. “They’re all good. But we need the president, whoever that is, to not be a bystander like this president, to step up to the plate, and do three things: make the deal, deliver the members of his party and sign the bill.”
“Fiscal cliff” tax increases
A variety of tax cuts enacted during the tenures of presidents George W. Bush and Barack Obama expire at the end of December. Expiring provisions include Bush-era cuts on wage and investment income and cuts for married couples and families with children. Also expiring is a 2 percentage point temporary payroll tax cut.
A look the tax increases facing typical families:
• A married couple with two children and an income of $100,000 would pay $7,935 in income taxes and $5,650 in payroll taxes this year, for a total federal tax burden of $13,585. Next year, they would face income taxes of $11,919 and payroll taxes of $7,650, for a total federal tax burden of $19,569, a total tax increase of $5,984.
• A married couple with no children that makes $60,000 (each spouse earns $30,000) would pay $5,105 in federal income tax for 2011. Their income taxes would rise to $6,308 next year and their payroll taxes would rise from $3,390 in 2011 to $4,590 in 2012.
• A single mother with three children and an income of $40,000 would benefit from the earned income and refundable child tax credits to receive a tax refund of $2,626 for 2011 and pay payroll taxes of $2,260 for a total federal tax burden of -$366. Under higher rates in 2013, she would owe $183 in income taxes and pay $366 more in payroll taxes.
• A married couple earning $200,000 (one spouse earns $150,000, the other $50,000) would see their income tax bill jump almost $6,000 (from $34,587 to $40,545) and their payroll taxes rise $3,258 ($9,742 to $13,000).
• A married couple earning $1 million faces income taxes of $311,344 for this year. That would jump to $354,224 next year at a maximum rate of 39.6 percent. They would pay almost $4,500 more in payroll taxes.
Source: Tax Foundation
— The Associated Press