By Lori Montgomery, Paul Kane and William Branigin, Updated: Monday, December 31, 2:16 PM
President Obama said Monday that an agreement to avoid the worst effects of the year-end fiscal cliff is “within sight,” but he stressed repeatedly that a deal being negotiated by Vice President Biden and Senate Minority Leader Mitch McConnell is “not done” yet, and he called on lawmakers to remain focused on the needs of the American people rather than politics.
In what the White House billed as an event with middle-class Americans, Obama said there were “still issues left to resolve” in the talks. He said he was “hopeful that Congress can get it done. But it’s not done.”
Obama said the potential agreement would prevent federal income taxes from rising on middle-class families, extend tax credits for children and college tuition, provide tax breaks to clean-energy companies and extend unemployment insurance for 2 million Americans.
He would have preferred to “solve all these problems in the context of a larger agreement,” the so-called grand bargain, that would have dealt with spending in a “balanced way,” he said.
“But with this Congress, that was obviously a little too much to hope for at this time,” Obama said, adding that perhaps “we can do it in stages.”
Congressional Republicans immediately pushed back, objecting to comments that one GOP senator described as “heckling Congress.”
The president made the remarks as negotiators moved closer to a deal Monday to cancel historic tax hikes for most Americans. But they were still hung up on spending, with Democrats so far resisting Republican proposals for spending cuts that would come in exchange for delaying automatic spending cuts at federal agencies for just three months.
As Obama prepared to deliver remarks about the “fiscal cliff” at the White House, negotiators for the administration and McConnell (R-Ky.) appeared to have nailed down many of the most critical tax issues, including a plan to let taxes rise on income over $450,000 a year for couples and $400,000 a year for individuals, according to people in both parties familiar with the talks.
McConnell said after Obama’s speech that he and Biden spoke multiple times Monday morning since their first 6:30 a.m. call and managed to resolve their differences on taxes. But he echoed Obama’s contention that the two sides had not yet resolved a dispute about whether to delay automatic spending cuts. McConnell urged Congress to pass the tax agreement — and debate replacing the so-called “sequester,” as the automatic spending cuts are known, in coming months.
“We’ll continue to work on finding smarter ways to cut spending, but let’s not let that hold up protecting Americans from the tax hike that will take place” on New Year’s Day, he said. “We can do this. We must do this.”
Under the proposed accord being hammered out by Biden and McConnell, households earning less than $450,000 would largely escape higher income tax bills, though couples earning more than $300,000 a year and individuals earning more than $250,000 would lose part of the value of their exemptions and itemized deductions, under the terms of the emerging agreement.
Low-income households would also benefit from a five-year extension of credits for college tuition and the working poor first enacted as part of Obama’s stimulus package in 2009. And businesses would see a variety of popular tax breaks extended, including a credit for research and development.
The tax on inherited estates would rise from 35 percent to 40 percent, though Democrats agreed to keep in place the current exemption for estates worth up to $5 million. And nearly 30 million households would be protected from paying the costly alternative minimum tax for the first time — either on their 2012 tax returns or at any time in the future. The developing agreement calls for a permanent fix.
The two sides also appeared to have reached consensus on unemployment benefits, with Republicans acceding to Democratic demands to keep benefits flowing to the long-term unemployed for another year. Medicare payments would not be cut for doctors next year, and the cost of preserving those programs would not be offset with other spending cuts.
However, negotiators were still at odds over how to handle the automatic “sequester” spending cuts, which are set to decimate budgets at the Pentagon and other federal agencies in the New Year. Democrats initially demanded that the cuts be delayed until 2015, but Republicans balked, arguing that the cost of any delay should be covered through additional spending cuts.
Instead of delaying the cuts for two years, at a cost of more than $200 billion, Republicans suggested delaying the sequester for three months — at a cost of $33 billion, according to people close to the talks. It was unclear Monday whether the hang-up was the brevity of the extension or the need to identify offsetting spending cuts.
All told, the proposal would raise roughly $600 billion in new revenue over the next decade from the wealthiest 2 percent of households — less than Obama had been seeking, and less than House Speaker John A. Boehner (R-Ohio) had offered in negotiations earlier this month. But the new tax revenue was a first step, Democrats said, toward asking the wealthy to do their part in reducing record budget deficits.
In his remarks in the South Court Auditorium of the White House with a contingent of middle-class Americans standing behind him, Obama highlighted progress in the fiscal cliff talks by noting that “just last month Republicans in Congress said they would never agree to raise tax rates on the wealthiest Americans.” He continued: “Obviously, the agreement that’s currently discussed would raise those rates, and raise them permanently.”
But he warned that “we still have deficits that have to be dealt with,” and he stressed that tax hikes represent only one part of the fiscal cliff.
“I want to make clear that any agreement we have to deal with these automatic spending cuts that are being threatened for next month, those also have to be balanced,” Obama said. “And that means the revenues have to be part of the equation in turning off the sequester and eliminating these automatic spending cuts.”
He added: “Now, if Republicans think that I will finish the job of deficit reduction through spending cuts alone … that will hurt seniors, or hurt students, or hurt middle- class families without asking also equivalent sacrifice from millionaires or companies with a lot of lobbyists, et cetera, if they think that’s going to be the formula for how we solve this thing, then they’ve another think coming. That’s not how it’s going to work. We’ve got to do this in a balanced and responsible way. And if we’re serious about deficit reduction and debt reduction, then it’s going to have to be a matter of shared sacrifice.”
Americans “need us to all stay focused on them,” Obama said. “Not on politics. Not on, you know, special interests.”
Minutes after Obama spoke, Sen. Bob Corker (R-Tenn.) took to the Senate floor to denounce Obama’s suggestion that Congress consider new tax dollars as an acceptable offset to delaying the sequester spending cuts.
“I know the president has fun heckling Congress,” he said of Obama’s speech. “It’s unfortunate that he doesn’t spend as much time working on solving problems as he does with campaigns and pep rallies.”
A top aide to House Majority Leader Eric Cantor (R-Va.) tweeted that Obama was making a deal harder with his speech, in which he observed that he would be president for the next four years and that Republicans have already caved on higher taxes for the wealthy. Both comments drew hearty campaign-style applause from his audience.
“If Obama’s goal was to harm the process and make going over the cliff more likely, he’s succeeding,” tweeted Doug Heye.
A top aide to McConnell charged that Obama had changed the terms of negotiations in his speech.
“Potus just moved the goalpost again. Significantly. This is new,” wrote Josh Holmes, McConnell’s chief of staff.
Sen. John McCain (R-Ariz.) delivered a blistering critique, accusing Obama of seeking short-term political gain at the expense of the nation’s economy. He denounced the speech as “a cheerleading, ridiculing of Republicans exercise.”
“So, what did the president of the United States just do?” McCain asked in a floor speech. “Well, he made a couple of jokes, laughed about how people are going to be here for New Year’s, sent a message of confrontation to the Republicans…. I guess I have to wonder — and I think the American people have to wonder — whether the president really wants this issue resolved, or is it to his short-term political benefit for us to go over the cliff?”
Earlier, with a New Year’s Eve deadline hours away, Democrats abandoned their demand to raise tax rates on household income over $250,000 a year. Obama had vowed repeatedly during his reelection campaign to allow tax cuts to expire for incomes over that level.
“There are a number of issues on which the two sides are still apart, but negotiations are continuing as I speak,” Senate Majority Leader Harry M. Reid (D-Nev.) said in a floor speech shortly after the body convened at 11 a.m. Monday. “But we really are running out of time,” he added.
Reid said there were “still some issues that need to be resolved before we can bring legislation to the floor.”
Regardless of whether an agreement is reached to avoid the “fiscal cliff,” many Americans are all but certain to face a broad hike in taxes starting Tuesday because of the expiration of the payroll tax cut, which was enacted in 2011 as a temporary measure to boost economic growth. The increased payroll taxes, combined with hikes affecting the very wealthy, would effectively mark the end of a prolonged period of declining taxation that has become a defining characteristic of the American economy.
McConnell’s office reported that talks between the Republican leader and Biden took place early Monday at 12:45 a.m. and 6:30 a.m. EST. A spokesman for McConnell expressed some hope of reaching a deal.
McConnell earlier was holding out to set the income threshold for tax increases even higher, at $550,000, according to people close to the talks in both parties. And he was protesting a Democratic proposal to raise taxes on investment profits for households with income above $250,000.
“The Leader and the VP continued their discussion late into the evening and will continue to work toward a solution,” Don Stewart, McConnell’s spokesman, said in a statement Monday.
Sen. Jon Kyl (R-Ariz.) said Monday morning that a “lot of progress” has been made in the fiscal cliff talks, but he cautioned that “there is no agreement yet,” Reuters news agency reported.
“Conversations are still ongoing,” Kyl said. “There has been a lot of progress.” Asked how long the talks could go on, Kyl said, “I guess until 11:59.”
Rep. Chris Van Hollen (D-Md.), the top Democrat on the House Budget Committee, also expressed some optimism Monday.
“I think there is some good news,” he said on CNN. “I think now there’s a better than 50-50 chance that we will avoid the fiscal cliff by midnight tonight.” He added: “It is a very open question about whether or not something put together in the Senate would be able to get enough votes in the House. But first things first. Let’s first see if they can get an agreement in the Senate.”
Van Hollen declined to get into specifics publicly about the latest tax-rate levels, but he said, “There’s been a lot of flexibility on the Democratic side on that issue, and now we’re waiting for additional flexibility on the Republican side.” He said that lawmakers still would like to “find an alternative set of deficit reduction to replace these meat-ax, across-the-board cuts. So that remains part of the conversation.”
Speaking after Reid on the Senate floor Monday morning, Sen. Tom Harkin, a liberal Democrat from Iowa, said he was “disturbed” to read in The Post that Democratic negotiators had agreed to raise the threshold for the income tax rate increases to $450,000, from $250,000, and to maintain estate taxes at the same level.
“This is one Democrat that doesn’t agree with that — at all,” Harkin said. “I just think that’s grossly unfair.” He added: “If you make $250,000 a year, you’re not middle class. You’re in the top 2 percent of income earners in America…. If we’re going to have some kind of deal, the deal must be one that really does favor the middle class — the real middle class, those that are making 30, 50, 60, 70,000 dollars a year. That’s the real middle class in America. And as I see this thing developing, quite frankly, as I’ve said before, no deal is better than a bad deal, and this looks like a very bad deal the way this is shaping up.”
Unless the two sides can reach agreement, historic tax hikes are set to hit virtually every American on Jan. 1, potentially driving the nation back into recession. An impasse would also throw the coming tax filing season into chaos.
Biden, a veteran dealmaker who served in the Senate for 36 years, entered the talks Sunday at McConnell’s request after the Republican leader said he had grown “frustrated” by the pace of negotiations with Reid.
Personal relations between the two Senate leaders have deteriorated after two years of draining battles over the budget. On Sunday, their antagonism produced a confusing day when talks seemed to be collapsing even as the two sides were moving closer to agreement on several fundamental issues.
Reid blamed McConnell for the impasse Sunday, saying Republicans were insisting on a change in the way inflation is measured that would serve to reduce Social Security benefits — a red flag for Democrats. Early in the day, Democratic aides described McConnell’s continued insistence on the change, known as “chained CPI,” as a “major setback.”
“At some point in the negotiating process, it becomes obvious when the other side is intentionally demanding concessions they know the other side’s not willing to make,” Reid said in a speech on the Senate floor.
McConnell countered by accusing Reid of “political gamesmanship” and announcing that he had telephoned Biden, opening up his own line of communication with the White House.
“I’m interested in a result here. And I’m willing to work with whomever can help,” McConnell said. “There is no single issue that remains an impossible sticking point. The sticking point appears to be a willingness, an interest, or courage to close the deal.”
Later, after consulting with fellow Republicans, McConnell agreed to take Social Security off the table.
The decision cheered Democrats. Obama had offered to include chained CPI in the big deficit-reduction package he had been negotiating with Boehner earlier this month. Obama endorsed the idea again Sunday, in an interview on NBC’s “Meet the Press,” calling it a tough decision he was willing to make “in pursuit of strengthening Social Security for the long term.”
But many Democrats say they would go along with the idea only as part of a far-reaching deal that also included at least $1.2 trillion in new tax revenue over the next decade. The deal under discussion Sunday would raise far less than that, somewhere between $600 billion and $800 billion.
“Chained CPI should be part of the larger discussion about the future of Social Security,” said Sen. Richard J. Durbin (D-Ill.), “not just a casual bargaining chip here at the last minute.”
Still, McConnell’s decision to drop the proposal served only to complicate the negotiations. By removing one of the few ideas on the table that would actually reduce spending, negotiators were left with a long list of new spending and only new taxes to cover the cost.
That infuriated many Republicans, who were already troubled by a deal that would require them to vote for a significant tax increase for the first time in more than 20 years. Republicans would be more open to the tax hike if it were used to reduce the federal budget deficit, but they remained resistant to raising taxes to expand government spending.
“You’re going to have to find some real spending cuts,” said Sen. Roy Blunt (R-Mo.). “You can’t just take this new tax revenue and say, ‘Well, we’ve got X number of dollars of new tax revenue, and that means we can spend that amount of money with no consequences.’ ”
As McConnell and Biden tried to bridge the divide, time had become as much of an enemy as the gritty details of tax and spending policy. Even if the leaders forge an agreement, the midnight deadline would be daunting to meet. Reid and McConnell would require the consent of all 100 senators to dispatch with the normal parliamentary procedures and complete debate and vote in hours rather than days.
And Senate passage would not guarantee an easy ride in the House, where Boehner’s conservative flank has shown deep resistance to any tax hikes. The speaker has indicated he does not want to approve a bill with mostly Democratic votes and a sliver of his 241-member Republican conference.
On Sunday, the House returned to work for the first time since the embarrassing failure of Boehner’s so-called “Plan B” option on Dec. 20. Republicans descended to a basement meeting room to eat pizza and receive a briefing from House leaders that was light on details.
Some lawmakers said they were anxious that the Senate would adopt a bill Monday and expect the House to act within a matter of hours. Instead, House members may push to delay a vote until Tuesday. That would mean missing the fiscal cliff deadline, but with U.S. financial markets closed for the New Year’s holiday, some members reasoned that the economy would be unlikely to suffer.
As House Republicans entered their meeting, aides filled the room with music, a Beatles classic. “Come together,” John Lennon sang, “right now.”
Ed O’Keefe, Zachary A. Goldfarb and Rosalind S. Helderman contributed to this report.