Fiscal Cliff Compromise Elusive

If GOP signs on to tax increases, Democrats would have to accept deeper spending cuts.

Republicans’ post-election rhetorical openness to higher taxes comes with a price that neither side of the fiscal debate in Washington may be willing to pay.

To get a deal with Democrats, Republicans would have to turn their talk of higher revenue into a vote that may split the party. And to transform Republicans’ talk into action, Democrats would need to accept deeper cuts to entitlement programs such as Medicare and Medicaid than they are willing to countenance.

“There’s still a great deal of ground that has to be covered before they get anywhere near a budget deal, and time is running” short, said Phil English, a former Republican congressman from Pennsylvania and now a lobbyist at Arent Fox LLP in Washington.

The depth of potential Republican support for tax increases and the conditions attached to it will be tested over the next few weeks as lawmakers negotiate with President Barack Obama. The goal is an agreement to avert $607 billion in automatic tax increases and spending cuts scheduled to begin in January.

Obama is scheduled to meet with small-business owners at the White House today and plans to travel to a toy factory in Pennsylvania on Nov. 30 to build public support for his approach to averting the so-called fiscal cliff at year’s end, according to an administration official who spoke on condition of anonymity.

As Congress returns to Washington this week to confront the fiscal dilemma, many Republicans who long dismissed any tax increase as unacceptable say now they are willing to consider higher revenue -- so long as Democrats accept cuts in entitlement programs as part of a deficit-reduction deal.

In the Senate, Saxby Chambliss of Georgia and Bob Corker of Tennessee have said they are willing to renounce their past anti-tax pledges.

While the verbal openness to taxes questions the hold of anti-tax advocate Grover Norquist on lawmakers who signed his pledge against tax increases, Norquist calls the requisite deal for spending cuts “a pink unicorn.”

So far, talks between Obama and congressional Republicans haven’t yielded any significant progress. Even with the changes in rhetoric and the willingness to work together, neither side has offered a plan that moves off their pre-election position.

The president spoke by telephone over the weekend with House Speaker John Boehner, an Ohio Republican, and Senate Majority Leader Harry Reid, a Nevada Democrat, White House press secretary Jay Carney said yesterday.

 

‘Remain Confident’

“We remain confident that we can achieve an agreement,” Carney said. More “work has to be done” to come up with a plan that both sides can live with.

The efforts have made such little headway that Obama is delaying inviting leaders to the White House this week as he had originally planned, according to a Democratic congressional aide who wasn’t authorized to discuss the talks publicly.

U.S. stocks fell yesterday. The Standard & Poor’s 500 Index declined 0.2 percent to 1,406.29 in New York, after the benchmark index jumped 3.6 percent last week, its biggest weekly gain since June.

The negotiations are occurring amid advertising and lobbying campaigns by advocates for keeping retirement savings tax breaks, current dividend tax rates and social safety-net programs.

House Republican leaders will meet tomorrow with business executives including Lloyd Blankfein, chief executive officer of Goldman Sachs Group Inc., according to a House aide who asked for anonymity because the meeting hasn’t been announced. Thomas Donohue, president of the U.S. Chamber of Commerce, met with White House aides yesterday, said Sally-Shannon Birkel, a spokeswoman for the chamber.

As their price for considering a tax increase, Republicans are demanding structural changes to entitlement programs and an overhaul of the tax code. They say they are waiting for Obama and congressional Democrats to make an offer on spending cuts.

Senator Lamar Alexander, a Tennessee Republican, said Obama needs to make the next move and propose restraints on entitlements.

“What’s missing is presidential leadership,” he said. “Maybe that’s excusable during a campaign. It’s not excusable now.”

 

Balance Package

Business groups could support a “balanced package” that doesn’t raise marginal tax rates and makes significant changes in entitlement spending, said Jade West, senior vice president for government relations at the National Association of Wholesalers and Distributors in Washington.

“The reality has set in and something has to be done,” said West, adding that many businesses pay taxes through their owners’ individual tax returns. “Clearly, the rhetoric reflects that status-quo election reality. I’m just waiting for something to come from the other side.”

Significant questions remain about what Republicans would accept. Boehner has drawn a line at increases in marginal tax rates, suggesting that he could support limits on deductions or other ways of increasing taxes on high earners that wouldn’t raise their rates.

At the same time, Boehner has said he wants to take in any additional revenue through economic growth and an overhaul of the tax code. His statements haven’t specified whether he is suggesting a tax increase as measured by congressional scorekeepers, who don’t allow revenue generated by economic growth from a tax overhaul to count in their estimates.

The tax overhaul Republicans are contemplating for 2013 could put long-lived features of the tax code such as the mortgage-interest deduction on the table for limits or elimination. Repealing the deduction would raise taxes on 20.2 percent of households, the nonpartisan Tax Policy Center estimated in 2011.

Democrats also will be faced with internal dissent over how much they are willing to give on entitlement spending.

“There’s a huge, huge opposition both within the Democratic Party and the administration and also the American people against doing radical changes to entitlements that would effectively cut a lot of benefits for middle-income families,” said Ethan Pollack, a senior policy analyst at the Economic Policy Institute in Washington, which favors policies that benefit low-income workers.

 

Durbin Speech

Senator Richard Durbin of Illinois, the chamber’s second-ranking Democrat, is giving a speech today on the party’s priorities for a deficit-reduction deal.

For years, the clearest statement of the Republican position on tax increases has been a pledge written by Norquist, president of Americans for Tax Reform. Signers promise to oppose tax rate increases and any limits on tax breaks that aren’t accompanied by equally sized tax rate cuts.

Their numbers have declined, while still a majority in the Republican-run House. In the 113th Congress that will convene in January, 219 of the 435 House members have signed Norquist’s pledge, according to Americans for Tax Reform. In the new Senate, 39 of the 100 senators are signers.

The 112th Congress, which will finish its business by year’s end and confront the fiscal cliff, includes 238 House signers of the pledge and 41 in the Senate. Some pledge-signers, including Chambliss, Corker, Senator Lindsey Graham of South Carolina and Representative Peter King of New York, all Republicans, say they aren’t bound by it any more.

“The only thing I’m honoring is the oath that I take when I serve when I’m sworn in this January,” Corker said on CBS News’s “This Morning” program yesterday.

Pledge or not, Republicans generally oppose tax increases and claim a mandate for their stance from their holding onto a majority in the House, even though Democratic House candidates won 1 million more votes than Republicans nationwide. Many House Republicans don’t share some senators’ openness to higher taxes.

“There’s a rhetorical shift in recognition of the fact that the election did send a message,” English said. “The actual scale of the policy shift is much smaller than some are reading into it.”

Over the past few years, some Republicans have made or endorsed deficit-reduction proposals that would raise taxes.

Three Senate Republicans, including Mike Crapo of Idaho and Tom Coburn of Oklahoma, supported a 2010 proposal from Obama’s fiscal commission. That panel, led by Democrat Erskine Bowles and Republican Alan Simpson, endorsed letting tax cuts on top earners expire and raising about $1 trillion on top of that.

 

Revenue Increase

In 2011, Boehner and Obama discussed an $800 billion revenue increase. That same year, Senator Pat Toomey of Pennsylvania made an offer during the deficit-reduction supercommittee that would have included higher revenue.

“Republicans in the Senate have moved toward a net increase through tax reform some time ago,” said former Representative Vin Weber of Minnesota, who advised presidential nominee and Norquist pledge-signer Mitt Romney. “It’s a big change.”

Still, none of the proposals with Republican support have been turned into legislative language and brought up for a vote.

“There would be a great deal of tension” among Republican lawmakers if presented with a proposal that would include many of the changes, English said.


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