President Obama met with House Speaker John Boehner, Senate Majority Leader Harry Reid, Senate Minority Leader Mitch McConnell and House Minority Leader Nancy Pelosi on Friday morning to discuss how to avert the "fiscal cliff," the combination of tax hikes and spending cuts set to start kicking in at the end of the year.
It was the president's first meeting with Congressional leaders on the issue since his reelection, and follows presidential sit-downs earlier this week with corporate leaders and left-leaning interest groups seeking to shape the discussion.
"Today, the President met with the bipartisan, bicameral leadership of Congress at the White House for over an hour," the White House said in a statement. "The President and the leadership had a constructive meeting and agreed to do everything possible to find a solution that averts the so-called 'fiscal cliff,' and to work together to find a balanced approach to reduce our deficit that includes both revenues and cuts in spending and encourages our long-term economic and job growth. Both sides agreed that while there may be differences in our preferred approaches, we will continue a constructive process to find a solution and come to a conclusion as soon as possible."
Congressional leaders described the meetings positively as well, with Boehner calling it "very constructive." An aide to the House GOP leader told CBS News that "the Speaker said he believes 2013 should be the year we begin to solve our debt problem through tax reform and entitlement reform, and proposed that both parties work together to avert the fiscal cliff together in a manner that ensures 2013 is that year. He proposed that both parties commit to working toward a framework for tax and entitlement reform in 2013 that sets revenue and spending levels."
Reid, meanwhile, said "We have the cornerstones of being able to work something out. We're both going to have to give up some of the things that we know are a problem."
Mr. Obama appeared to be in good spirits prior to the meeting, publicly congratulating Boehner on the fact that tomorrow is his birthday. ("We're not going to embarrass him with a cake," the president joked, "because we didn't know how many candles were needed.") But no amount of good cheer will make it easier for the two men to bridge their considerable differences without angering elements of their own party and base before the Dec. 31 deadline.
The most glaring difference involves allowing the Bush-era tax cuts expire on family income above $250,000, which would raise rates above that level from 35 percent to 39.6 percent. Mr. Obama campaigned on allowing those cuts to expire for the highest-earners, and he stressed the issue in a news conference Wednesday. He has called on Congress to immediately pass legislation to extend the Bush-era tax cuts for the 98 percent of Americans who make below that threshold. Without action, tax rates will increase for nearly all households at the end of the year. White House press secretary Jay Carney said this week that the president "will not sign, under any circumstances, an extension of tax cuts for the top 2 percent of American earners." Mr. Obama's opening salvo was to increase taxes on the wealthy and corporations by $1.6 trillion in conjunction with unspecified spending cuts.
Republicans are also publicly standing by their position, though there have been some cracks in the united front. "What we won't do is raise tax rates," McConnell said Thursday. Boehner has offered a conciliatory tone and said he is open to revenue increases, but argues that they should come from reforms to the tax code such as closing loopholes - the same position he held before the election. He says that raising rates on the wealthiest Americans would hurt small business and cause harm to the economy, a contention that is up for debate. Republicans are seeking major changes to entitlement programs, which they consider the chief driver of the deficit and debt.
Yet Gov. Bob McDonnell, R-Va., and former Gov. Haley Barbour, R-Miss., said this week that Republicans need to be open to raising tax rates on the wealthy in the wake of an election in which the "people have spoken," in McDonnell's words. Another influential Republican, Weekly Standard editor William Kristol, said last Sunday that "It won't kill the country if we raise taxes a little bit on millionaires."
Despite an election that returned Mr. Obama to the Oval Office and kept the general makeup of Congress unchanged, the contours of the discussion have changed since Democrats and Republicans failed to come to a "grand bargain" to reduce the deficit one year ago. Part of that is due to the fact that Mr. Obama was reelected while Democrats made gains in the House and Senate, giving the party more leverage. And part of it has to do with a decision by House Republicans that they may now regret.
Back in 2011, House Republicans would only agree to raise the debt ceiling in exchange for a deal to significantly reduce the deficit. So the parties agreed to set up a bipartisan "supercommittee" to find $1.2 trillion in savings. And they passed a law mandating that if the supercommittee failed, automatic spending cuts would kick in at the end of the year. The supercommittee did indeed fail, which is what led to the spending cuts portion of the "fiscal cliff": A requirement for $1.2 trillion in deficit reduction over a decade through indiscriminate cuts to most defense and non-defense domestic programs, including about $110 billion in cuts in 2013.
The tax hikes, to the tune of about $500 billion in 2013, would result from the expiration of the Bush-era income tax cuts and the end of the payroll tax holiday that began in 2011, among many other factors.
Going off the cliff would affect nearly 90 percent of taxpayers, and many economists as well as the Congressional Budget Office say doing so would tip the economy into recession. From a purely political perspective, however, the consequences may be worse for Republicans. A Pew Research Center poll this week found that 53 percent of Americans would blame Republicans in Congress if no deal is struck, while 29 percent would blame the president.
Democrats say they will not make a deal if Republicans won't reverse their opposition to raising tax rates on the wealthy, in part because going over the fiscal cliff strengthens their negotiating position. Incoming Senate Budget Committee chair Sen. Patty Murray, D-Wash., told NPR Friday that while no one wants to see taxes go up on most Americans, she is not willing to make a deal that would hurt middle-class families.
"If the Republicans say, no, we're going to put a little line in the sand and say the wealthiest Americans don't have to pay any increased revenue or be a part of the solution, then we will go past the December 31st deadline and begin over next year with addressing this challenge," she said. "And any package that we put out there will be a tax cut, and I think Republicans will find themselves in a real box."
That's an important point: If and when taxes go up at the start of 2013, Democrats will be in a position to put forth a tax cut for 98 percent of Americans - and Republicans will face the prospect of opposing a major tax cut if they refuse the deal. Democrats believe that reality gives them significant leverage in the negotiations.
But going over the cliff carries political risks for Democrats too. While the tax cuts would be implemented gradually, not all at once at the start of the year - the "cliff" metaphor is somewhat misleading - a failure to reach a deal could spook the financial markets and have negative consequences for the U.S. credit rating, with unpredictable fallout. Right now the GOP is largely seen as the problem, but that could change depending on the contours of the negotiation. Democrats could suffer long-term harm if the economy takes a negative turn shortly after a Democratic president was reelected. And many on the left will be angered if the president allows cuts to favored domestic programs.
There is no shortage of options for lawmakers as they seek a way forward. They could pass a grand bargain that would both avert the cliff and include major entitlement reform, changes to the tax code, and even an agreement to raise the debt ceiling, which will soon again need to be addressed. That's a challenge in a lame-duck Congress, however, and it is more likely that they will pass a law to avert the cliff for a month or two while they try to work out some sort of deal. White House officials are reportedly in discussions to replace the looming indiscriminate spending cuts and tax hikes with more targeted cuts and tax increases that would not have the same negative impact on the economy.
According to a Boehner aide, the House speaker told the president Friday that tax and entitlement reform is too complex to complete this year. Boehner's goal in the coming weeks, he told the president, is to decide upon long-term revenue targets for tax reform and targets for entitlement savings.
"Once we settle on those targets, the Speaker proposed, we can create simple mechanisms, in statute, that would achieve those revenue and spending goals," the aide said. "They would be in place unless or until more thoughtful policies replace them."