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WASHINGTON — Senate leaders and their aides spent Saturday searching for a formula to extend tax cuts for most Americans that could win bipartisan support in the Senate and final approval in the fractious House by the new year, hoping to prevent large tax increases and budget cuts that could threaten the fragile economy.
Luke Sharrett for The New York Times
Speaker John A. Boehner stopped by the Capitol briefly to see his chief of staff on Saturday afternoon.
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Senate Leaders Set to Work on a Last-Minute Tax Agreement(December 29, 2012)
- As part of the last-minute negotiations, the lawmakers were haggling over unemployment benefits, cuts in Medicare payments to doctors, taxes on large inheritances and how to limit the impact of the alternative minimum tax, a parallel income tax system that is intended to ensure the rich pay a fair share but that is increasingly encroaching on the middle class.
President Obama said that if talks between the Senate leaders broke down, he wanted the Senate to schedule an up-or-down vote on a narrower measure that would extend only the middle-class tax breaks and unemployment benefits. The Senate majority leader, Harry Reid of Nevada, said he would schedule such a vote on Monday absent a deal.
If Congress is unable to act before the new year, Washington will effectively usher in a series of automatic tax increases and a program of drastic spending cuts that economists say could pitch the country back into recession.
The president and lawmakers put those spending cuts in place this year as draconian incentives that would force them to confront the nation’s growing debt. Now, lawmakers are trying to keep them from happening, though it seemed most likely on Saturday that the cuts, known as sequestration, would be left for the next Congress, to be sworn in this week.
“We just can’t afford a politically self-inflicted wound to our economy,†Mr. Obama said Saturday in his weekly address. “The housing market is healing, but that could stall if folks are seeing smaller paychecks. The unemployment rate is the lowest it’s been since 2008, but already families and businesses are starting to hold back because of the dysfunction they see in Washington.â€
The fear of another painful economic slowdown appears to have accelerated deal-making on Capitol Hill with just 48 hours left before the so-called fiscal cliff arrives. Weeks of public sniping between Mr. Reid, the Democratic leader, and Senator Mitch McConnell of Kentucky, the Republican leader, ebbed on Friday evening with pledges of cooperation and optimism from both.
On Saturday, though, that sentiment was put to the test as 98 senators waited for word whether their leaders had come up with a proposal that might pass muster with members of both parties. The first votes in the Senate, if needed, are scheduled for Sunday afternoon.
“It’s a little like playing Russian roulette with the economy,†said Senator Mark Warner, Democrat of Virginia. “The consequences could be enormous.â€
Members of Congress were mostly absent from the Capitol on Saturday, after two days of Senate votes on other matters and a day before both chambers were to reconvene. However, senior aides were working on proposals in their offices or at their homes.
Speaker John A. Boehner stopped by the Capitol briefly to see his chief of staff on Saturday afternoon. Mr. McConnell spent much of the day in his office.
Aides to Mr. Reid were expecting to receive offers from Mr. McConnell’s staff, but no progress was reported by midday. Even if the talks took a positive turn, Senate aides said, no announcement was expected before the leaders briefed their caucuses on Sunday.
The chief sticking point among lawmakers and the president continued to be how to set tax rates for the next decade and beyond. With the Bush-era tax cuts expiring, Mr. Obama and Democrats have said they want tax rates to rise on income over $250,000 a year, while Republicans want a higher threshold, perhaps at $400,000.
Democrats and Republicans are also divided on the tax on inherited estates, which currently hits inheritances over $5 million at 35 percent. On Jan. 1, it is scheduled to rise to 55 percent beginning with inheritances exceeding $1 million.
The political drama in Washington over the weekend was given greater urgency by the fear that the economic gains of the past two years could be lost if no deal is reached.
Some of the consequences of Congressional inaction would be felt almost at once on Tuesday, in employee paychecks, doctors’ offices and financial markets. Analysts said the effect would be cumulative, building over time.
An early barometer would probably be the financial markets, where skittish investors, as they have during previous Congressional cliffhangers, could send the stock market lower on fears of another prolonged period of economic distress.
In 2011, the political battles over whether to raise the nation’s borrowing limit prompted Standard & Poor’s to downgrade its rating of American debt, suggesting a higher risk of default. The Dow Jones industrial average fell 635 points in a volatile day of trading after the downgrade.
This month, traders have again nervously watched the political maneuvering in Washington, and the markets have jumped or dropped at tidbits of news from the negotiations. Two weeks ago, Ben S. Bernanke, the chairman of the Federal Reserve Board, predicted that if lawmakers failed to reach a deal, “the economy will, I think, go off the cliff.â€
Immediately — regardless of whether a deal is reached — every working American’s taxes will go up because neither party is fighting to extend a Social Security payroll tax cut that has been in place for two years.<nyt_text>
But failure to reach a broader deal on taxes and spending would increase taxes even further, returning rates to Clinton-era levels. January paychecks would shrink as employers start withholding more for taxes.
“There’s going to be a hit to people who don’t have much capacity to absorb a hit,†said Christine L. Owens of the National Employment Law Project. “A lot of families are going to be in a bad place, not being able to pay their rent, or their mortgage, or their bills.â€
In short order, such changes are expected to dampen consumer confidence and spending, with potentially grave consequences for an economy already struggling to recover momentum.
“Every day that goes by is this needless self-flagellation,†said Stuart G. Hoffman, the chief economist of PNC Financial Services Group, who estimated that the tax increases and loss of unemployment benefits would reduce take-home pay by $9 billion a week.
The fallout would continue to worsen if the inaction and stalemate continue into late January.
Tens of millions of families would probably be ensnared by the alternative minimum tax, raising their 2012 tax bill and potentially throwing the coming tax season into disarray. This month, the Internal Revenue Service warned that as many as 100 million filers, out of 150 million, could be affected. Analysts said the I.R.S. might have to delay the start of filing season and the delivery of expected refund checks.
Again, the lowest-income families are expected to be hit the hardest. “Those early filers, 95 percent of them are expecting a healthy refund early in the year,†said Mark Steber, the chief tax officer of Jackson Hewitt.
Come mid-January, some Medicare patients also might struggle to find doctors to treat them. Without Congressional action, doctors would face two cuts to reimbursement rates: a 26.5 percent reduction in Medicare payment rates from a 1997 law, and a further 2 percent cut adopted to reduce the deficit last year.
“I feel I am being held hostage,†said Lee R. Rovik, 70, a Medicare beneficiary in Camdenton, Mo. A sign at his doctor’s office warns that it might have to close if Congress does not fix the Medicare payment formula.
“Politicians don’t give a damn about me or the doctor,†Mr. Rovik said. “If the clinic goes out of business, which is entirely possible, where will we go?â€
By late February or early March, lawmakers would face another economic showdown over raising the nation’s borrowing limit again to avoid a cash-management crisis and a government shutdown. Republicans have already said they intend to use the Congressional authority to increase the so-called debt ceiling to extract cuts from entitlement programs — a threat Mr. Obama has said he will resist.
Around the same time, the government and its workers would begin feeling the cuts to defense and domestic spending.
Without a compromise, the Pentagon and its civilian contractors would face steep reductions in virtually every program. Military officials said those spending reductions — $500 billion over 10 years — would eventually force the canceling or shrinking of projects and large-scale layoffs of military and civilian personnel.
Hundreds of other federal programs would see cuts, beginning in late January. These include reductions of about 8 percent in the Special Supplemental Nutrition Program for Women, Infants, and Children; the Low-Income Home Energy Assistance Program; and rental housing assistance.
Economists said the spending cuts and tax increases by themselves would smother the recovery. Analysts fear that the economic disruption and political flailing could spook financial markets, amplifying the pain.
“It would be a triple whammy,†said Mr. Hoffman of PNC, referring to the tax hikes, spending cuts and confidence effects. “Actually, as many whammies as you could come up with.â€
Robert Pear and Jennifer Steinhauer contributed reporting.
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