Movement seen in fiscal fight talks

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Associated Press

Posted on December 17, 2012 at 1:07 PM

WASHINGTON (AP) — President Barack Obama and the Republican leader of the U.S. House met at the White House on Monday in hopes of continuing to make progress on a plan to deal with the "fiscal cliff" crisis that threatens the U.S. economy.

The two negotiators are running out of time if they hope to make an agreement and get it passed by Congress before an economically toxic mix of huge tax increases and slashing cuts to the Pentagon and other federal agencies begins to take effect at the beginning of January. Experts warn the automatic tax hikes and spending cuts — the result of past failures to reach a deal on cutting the burgeoning deficit — could send the economy over a "fiscal cliff" and into another recession.

The meeting came after House Speaker John Boehner on Friday offered $1 trillion in higher tax revenue over 10 years and an increase in the top tax rate on people making more than $1 million a year, his first move in Obama's direction on rates. Boehner is also offering a large enough extension in the government's borrowing cap to fund the government for one year before the issue must be revisited — conditioned on Obama's agreeing to $1 trillion in spending cuts.

"The president and the speaker are meeting at the White House to continue their discussions about the fiscal cliff and balanced deficit reduction," said Boehner spokesman Michael Steel. The two met for about 45 minutes, officials said.

Given the pressing timetable, president and speaker are hoping to set the broad parameters of an agreement while taking care of urgent business like extending tax cuts for most earners. Other steps, like overhauling the tax code and additional cuts to popular programs like health care for the elderly, would be left to be fleshed out next year.

Obama is also pushing extending jobless benefits for the long-term unemployed and wants some kind of extension of a payroll tax cut.

Boehner's latest offer broke a long impasse. It calls for about $450 billion in revenue raised in part from increasing the top rate on million-dollar-plus income from 35 percent to 39.6 percent, the rate that stood in the 1990s during the government of President Bill Clinton.

The additional revenue required to meet the $1 trillion target would be collected through a rewrite of the tax code next year and by slowing the inflation adjustments made to tax brackets.

In return, Boehner is asking for $1 trillion in spending cuts from government benefit programs like health care for the elderly. Those cuts would defer most of a painful set of across-the-board spending cuts set to slash many domestic programs and the military budget by 8-9 percent, starting in January.

Boehner's proposal was described Sunday by officials familiar with it. They required anonymity because of the sensitivity of the talks.

Boehner also continues to press for a less generous inflation adjustment for government pension benefits, a move endorsed by many budget hawks. Obama and Democrats on last year's deficit "supercommittee" endorsed the idea in offers made last year, but they're more reluctant now.

The new inflation adjustment would also raise about $70 billion over a decade in new revenues because tax brackets would rise more slowly for inflation, driving people more quickly into higher tax brackets.

The increased optimism come as time is running out before the adjournment of Congress. Tax rates on all workers go up in January, and $109 billion worth of across-the-board spending cuts begin to take effect then as well. Taken together with the expiration of extended jobless benefits and a 2-percentage-point break in payroll taxes, the combination of austerity steps threatens to send the economy back into recession.

The burst of optimism is tempered by the caution that the remaining steps to reaching a deal — particularly how much to cut health care for the elderly and whether to impose the new, less generous inflation adjustment to government pension payments — are difficult. Then comes the job of selling it to a polarized Congress, where Republican conservatives have been railing against higher tax rates for months as sure to cost jobs and hurt small business, and Democrats have taken a harder line against cost curbs to health care for the elderly.

But it appears clear there is momentum as White House and congressional aides worked through the weekend.

The movement comes as an increasing number of Republicans have called for a tactical retreat that would hand Obama a victory on his longstanding campaign promise to raise taxes on households making more than $250,000 a year. That increase, combined with an increase in the tax rate on investment income from 15 percent to 20 percent, would raise about $800 billion in tax revenue over a decade.

In that context, Boehner's move could be seen as an attempt to get spending cuts linked to the rate increase rather than giving them up and getting nothing in return. Judging from the numbers, Boehner is also willing to allow tax rates on investment income to increase for high-end income and allow the reinstatement of curbs on the personal exemption and the value itemized deductions for high-income earners.

Obama has offered $600 billion in spending cuts over a decade, including $350 billion from federal health care programs and $250 billion from other cuts to domestic programs.

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Associated press writers Jim Kuhnhenn and Andrew Taylor contributed to this story.

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