WASHINGTON —
Congress returns to the nation’s capital next week with hopes of a big deal but strong odds favoring another piecemeal approach to avoid the so-called fiscal cliff, in a race against the clock to address tax and budget issues while keeping the U.S. economy from tumbling back into recession.
The cliff is a series of tax measures that have expired, or are set to expire at year’s end, along with automatic, deep budget cuts that will take effect unless lawmakers agree to an alternative plan. Additionally, the government is slated to hit a debt ceiling sometime between December and February, and tough negotiations are expected over terms under which more government borrowing would be allowed.
Congress and the White House usually devise a solution to avoid such crises, but not until they absolutely must. When lawmakers waited until the last minute to resolve the debt ceiling fight last year, and voted down a 2008 bank bailout, stock prices dropped sharply. It could happen again.
“That to me is the wild card,” said R. Bruce Josten, executive vice president for the U.S. Chamber of Commerce.
Lawmakers sent mixed signals this week about serious negotiations vs. driving briefly off the cliff’s edge before settling.
Tuesday’s election results kept the same power players in place, the same group that went to that edge repeatedly during budget and debt ceiling negotiations over the last two years.
House Speaker John Boehner, R-Ohio, said Wednesday that he was ready to “find the common ground that has eluded us” and talk to Democrats, even about raising revenue.
Senate Majority Leader Harry Reid, D-Nev., also talked conciliation, promising not to draw “any lines in the sand.”
Taxes are likely to be the thorniest issue.
President Barack Obama campaigned on extending the Bush-era tax rates only for family incomes below $250,000 and individual incomes below $200,000. Republicans are adamant that current rates should be extended for all. Partisan sniping already has begun.
“There is no mandate for raising taxes on the American people,” said House Majority Leader Eric Cantor, R-Va.
Not so, countered Rep. Sander Levin of Michigan, the top Democrat on the tax-writing Ways and Means Committee. “The president’s re-election sent a clear message that House Republicans must end their intransigence . to find a balanced approach that combines spending reductions and revenue,” he said.
There is an escape hatch: Lawmakers don’t have to act this year. The Bush-era cuts could expire, but Congress would have all next year to find a way to restore some or all before the 2014 tax filing deadline. The Treasury Department could tell the Internal Revenue Service to maintain existing tax withholding schedules in the meantime.
That could become part of a compromise that includes a tax code overhaul. Boehner signaled as much Wednesday, suggesting a 2012 agreement could be a “down payment on, and catalyst for, major solutions” in 2013.
The other big fight this year involves budget cuts. As part of the 2011 debt ceiling deal, automatic cuts of $109 billion for the current fiscal year, including $55 billion from defense, will kick in starting in January unless a separate deal can be forged. Few want that to occur - Obama has flatly said the defense cuts “will not happen.”
The challenge: how to cut government spending but not so quickly and so deeply that it hurts a fragile recovery.
Private talks began well before the election. The Senate’s “Gang of Eight,” four Democrats and four Republicans, met this fall at Mount Vernon, Va., and held a conference call Wednesday to discuss strategy. They were unable to find agreement but plan to keep talking. Other discussions are being held by different lawmakers and their staffs throughout the Capitol.
“We all know they will come to some sort of deal that removes the worst-case possibilities from the table, but we don’t know how they will do that. The risk is how long they wait,” said Neil Dutta, director of economic research at Renaissance Macro Research in New York.
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