Reid Hopes for Last-Minute Budget Deal

Biggest sticking point said to be how to deal with more than $600 billion in automatic spending cuts.

Senate Majority Leader Harry Reid said negotiators could reach a U.S. budget deal today that would protect all but top earners from a tax increase at midnight.

“Negotiations are continuing as I speak,” Reid, a Nevada Democrat, said as the Senate reconvened in Washington. “Americans are still threatened with a tax hike in just a few hours.” Earlier, asked as he entered the Capitol whether he thought a deal could be reached today, Reid said, “I really hope so. We’re not there yet, though.”

The biggest sticking point in the final hours before the deadline is how to cancel or delay more than $600 billion in automatic spending cuts to defense and domestic programs, said two congressional aides familiar with the talks. Lawmakers also were narrowing the annual income level at which tax rates would increase in 2013 to between $400,000 and $500,000.

Progress picked up after a weekend of private talks and public sniping as lawmakers sought to avert more than $600 billion in tax increases and spending cuts that make up the so-called fiscal cliff. Even if a deal is reached and can get through both chambers of Congress, it would be more limited than President Barack Obama and leaders of both parties sought. It would set up another battle early in 2013 over the budget and the federal debt limit.

Senate Minority Leader Mitch McConnell said he and Vice President Joe Biden spoke at 12:45 a.m. and 6:30 a.m. today. As he arrived at his office, McConnell, a Kentucky Republican, gave reporters no indication of whether there was movement toward a deal.

Senator Tom Harkin, an Iowa Democrat, said on the Senate floor this morning that he doesn’t support a $450,000 income threshold, signaling that a deal reached by Biden and McConnell could lose the votes of some Democrats.

“This is one Democrat that doesn’t agree with that -- at all,” Harkin said on the Senate floor. “We’re going to lock in forever the idea that $450,000 a year is middle class in America?”

Democrats want to delay the automatic federal spending cuts for two years, at a cost of $200 billion, though they haven’t identified other savings to pay for it.

 

Budget Savings

Republicans insist that the spending cuts be offset with savings elsewhere in the budget and that new revenue should be used to reduce the deficit. Democrats have sought for more than a year to use new revenue to turn off the spending cuts.

Talks between Reid and McConnell stalled yesterday, and McConnell reached out to Biden in an effort to break the impasse.

Representative Chris Van Hollen of Maryland, the top Democrat on the House Budget Committee, told Bloomberg Television today that the odds of reaching a deal are “a little better than 50-50” while noting that “a lot has to go right.”

Stocks rose. The Standard & Poor’s 500 Index gained 0.2 percent to 1,405.49 at 11:29 a.m. in New York. The Dow Jones Industrial Average fell 6.88 points, or 0.1 percent, to 12,931.23 today. The benchmark 10-year Treasury bond yield increased three basis points, or 0.03 percentage point, to 1.73 percent at 11:26 a.m. in New York, according to Bloomberg Bond Trader prices.

Tax cuts first enacted during George W. Bush’s presidency are scheduled to expire tonight. Obama and other Democrats have sought to extend the reductions for married couples’ income up to $250,000 a year while letting tax rates rise for income above that amount. Republicans oppose tax rate increases for any income level.

Illinois Senator Dick Durbin, the second-ranking Democrat, said unresolved issues also include expiring estate tax levels and how to prevent an expansion of the alternative-minimum tax. Democrats, who represent many of the high-tax states where the AMT has the biggest bite, want to permanently limit its reach.

There is a direct relationship between the income level at which higher taxes will begin and the estate tax, said a Senate aide familiar with the negotiations.

The higher the threshold for an income tax increase, the more Democrats want Republicans to relent on estate taxes, the aide said. Republicans want to keep estate taxes at current levels, with a $5.12 million per-person exemption and 35 percent top rate; some Democrats agree with this. Obama wants a $3.5 million exemption and 45 percent top rate.

 

Capital Gains

Durbin also said there is a debate over raising the rate for capital gains and dividends from 15 percent to 20 percent. The issue is at what income level the rate would jump to the higher percentage, he said.

According to a person familiar with the talks who asked for anonymity when discussing them, Democrats are pushing for an income level as low as $250,000 as a trigger for a 20 percent tax rate on capital gains and dividends. Taxpayers with income levels below $250,000 would still pay a capital gains and dividend tax rate of 15 percent, the person said.

Without a deal, the capital gains tax rate for top earners is scheduled to rise 20 percent and dividends would be taxed as ordinary income. With or without a deal, top earners will pay an additional a 3.8 percent tax on capital gains and dividends under the 2010 health-care law.

Lawmakers haven’t said whether any deal would include provisions to halt a cut in Medicare payments to doctors.

 

Recession Warning

Allowing the fiscal changes to take effect would cause a recession in the first half of 2013, according to the Congressional Budget Office.

In the event the Senate can’t reach a compromise, Obama has asked Reid to ready a bare-bones bill for a vote today to extend expanded unemployment benefits and tax cuts on family income up to $250,000.

If Congress does nothing, taxes will rise in 2013 by an average of $3,446 for U.S. households, according to the nonpartisan Tax Policy Center in Washington.

Tax filing for as many as two-thirds of U.S. taxpayers could be delayed into at least late March. Defense spending would be cut, and the economy would probably enter a recession in the first half of 2013, according to the Congressional Budget Office.

The effects of the higher tax rates and federal spending cuts would accumulate over a matter of months. Congress could reverse them by acting retroactively in 2013.

 

Bloomberg News

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