WASHINGTON - Senate leaders rushed to assemble a last-ditch agreement to avoid middle-class tax increases and possibly delay steep spending cuts in an urgent attempt to find common ground after weeks of postelection gridlock.
The focus turned to the Senate after President Barack Obama held an hour-long, high-stakes meeting with the leaders of Congress on Friday afternoon to try to avoid the automatic austerity measures that begin to take effect Jan. 1 that threaten to send the economy sputtering into another recession
An impatient Obama pressed top lawmakers to cut a deal, even one that falls short of the ambitions he and congressional leaders may once have harboured for a bigger deficit reduction package. Without a resolution, he warned, "every American's paycheque will get a lot smaller."
"Congress can prevent it from happening, if they act now," he said in his weekly Saturday radio and internet address.
The U.S. faces the so-called "fiscal cliff" in January because tax rate cuts dating back to President George W. Bush's tenure expire on Dec. 31. The pending across-the-board reductions in government spending, which will slice money out of everything from social programs to the military, were put in place last year as an incentive to both parties to find ways to cut spending. That solution grew out of the two parties' inability in 2011 to agree to a grand bargain that would have taken a big bite out of the deficit.
Unless Obama and Congress act to stop them, about $536 billion in tax increases, touching nearly all Americans, will begin to take effect in January. That will be coupled with about $110 billion in spending cuts, about 8 per cent of the annual budgets for most federal departments. Economists predict that if allowed to unfold over 2013 this double whammy would result in a big jump in unemployment, financial market turmoil and a slide back into recession.
Facing a deadline that was born out of Washington's dysfunction, success was far from guaranteed — even on a slimmed-down deal that postponed hard decisions about spending cuts into 2013 — in a Congress where lawmakers grumbled about spending the new year holiday in Washington.
Following Friday's White House meeting, aides to Senate Republican leader Mitch McConnell and Senate Majority Leader Harry Reid, D-Nevada, began racing against the clock for a bipartisan bargain. The leaders could present legislation to senators as early as Sunday, with a vote possible on Sunday or Monday.
Adding pressure was this week's warning from Treasury Secretary Timothy Geithner that the government would hit its $16.4 trillion borrowing limit on Monday, the final day of the year. That would make it harder for the U.S. to pay its bills.
The guest list for the White House meeting included Reid, McConnell, House Speaker John Boehner, and House Democratic leader Nancy Pelosi. But the key players were clearly Reid and McConnell, both of whom stayed behind briefly at the White House and huddled with their staffs and Obama's top legislative aide, Rob Nabors, in the West Wing Cabinet Room just outside the Oval Office.
Neither side expected compromise to be easy. However, McConnell and Reid voiced unexpected optimism that they could work toward a deal that could win support in both their camps.
Warned Reid: "Whatever we come up with is going to be imperfect."
Looking to add pressure on negotiators, Obama said that absent a compromise he expects Reid to put legislation on the floor to prevent tax increases on the middle class and extend unemployment benefits — an implicit challenge to Republicans to dare to vote against what polls show is popular.
Speaking for Republicans in a Saturday radio address, Sen. Roy Blunt of Missouri sought to put the burden of a deal on Obama and Reid.
"We still can avoid going over the fiscal cliff if the president and the Democrat-controlled Senate step forward this week and work with Republicans to solve this problem and solve it now," he said.
Whatever manages to pass in the Senate, with its Democratic majority, would then face a second test in the Republican-controlled House of Representatives.
Boehner, a Republican speaker who has struggled recently with anti-tax rebels inside his own party, said through an aide that he would await the results of the talks between the Senate and White House. A House vote could come as late as Wednesday, the final full day before a new Congress takes office.
Officials said there was a general understanding that any agreement would block scheduled income tax increases for middle-class earners while letting rates rise at upper-income levels.
Obama was sticking to his campaign call for increases above $250,000 in annual income, even though in recent negotiations he said he could accept $400,000.
The two sides also confronted a divide over estate taxes. Obama favours a higher tax than is currently in effect, but one senior Republican, Sen. Jon Kyl of Arizona, said he's "totally dead set" against it. Speaking of fellow Republican lawmakers, he said they harbour more opposition to an increase in the estate tax than to letting taxes on income and investments rise at upper levels.
But the estate tax was more likely to be used as a possible bargaining chip that Democrats could give away in exchange for higher rates for top earners and other Obama priorities.
Obama and Democrats want to prevent the expiration of unemployment benefits for about 2 million long-term jobless men and women, and there is widespread sentiment in both parties to shelter doctors from a 27 per cent cut in Medicare fees. Medicare is the government-funded program that provides health care coverage to the elderly.
Also likely to be included in the negotiations are taxes on dividends and capital gains, both of which are scheduled to rise with the new year.
One Republican who was briefed on the White House meeting said Boehner made it clear he would leave in place spending cuts scheduled to take effect unless alternative savings were included in any compromise to offset them. In previous White House proposals, Obama has suggested finding enough cuts in government spending to put off the steeper cuts for up to six months.
Obama, speaking to reporters following his meeting with the congressional leaders, faulted a system that left crucial decisions to the last minute, a way of governing that he said the public finds "mindboggling."
"Outside of Washington nobody understands how it is that this seems to be a repeat pattern, over and over again," he said.
Still, Obama himself is part of the negotiating process, and his meeting with all four top leaders Friday was the first since Nov. 16. A phone call he placed Wednesday night to McConnell was the first the Republican leader had received from a Democrat on the fiscal talks since the Thanksgiving holiday in late November.
Looking to add pressure on negotiators, Obama said he expects Reid to put legislation on the floor to prevent tax increases on the middle class and extend unemployment benefits for the long-term jobless — an implicit challenge to Republicans to dare to vote against what polls show is popular.
The start of negotiations in the Senate marked a new endgame for discussions that have moved in fits and starts since the November election.
Boehner refused for weeks to accept any tax rate increases, and simultaneously accused Obama of skimping on the spending cuts he would support as part of a balanced deal to reduce deficits, remove the threat of spending cuts and prevent the across-the-board tax cuts.
Last week, Boehner presented a Plan B measure that would have let rates rise on million-dollar earners, well above Obama's latest offer for a $400,000 threshold.
Facing defeat after he couldn't muster enough support in the Republican caucus, Boehner scrapped plans for a vote, leaving the economy on track for the cliff that leaders in both parties had said they want to avoid.
Associated Press writers Jim Kuhnhenn, David Espo, Alan Fram and Andrew Taylor contributed to this report.