Republicans and Democrats in the U.S. Congress are starting to talk about the benefits of waiting until January to reach a budget deal, even as House Speaker John Boehner signals openness to allowing tax rates to rise for millionaires.
President Barack Obama rejected a Dec. 14 offer by Boehner to raise rates on household income above $1 million a year and lift the federal debt ceiling in exchange for containing entitlement program costs. While Obama wants higher rates for income above $250,000, Boehner’s offer marked movement because he has opposed increased rates for any income level.
In his latest offer, Boehner also said he would accept $1 trillion in revenue, up from $800 billion, according to a person familiar with the talks who requested anonymity when discussing the negotiations. That person said Boehner’s offer would pair the revenue increase with equal cuts to entitlement programs.
Still, making a deal in early January that extends income tax cuts for all except top earners could be easier for Boehner to sell to House Republicans because all rates will have risen as of Jan. 1. At that point, Obama will have made good on his campaign pledge to raise rates for top earners, giving him political cover to accept cuts to entitlement programs that Republicans are seeking.
“One could make the argument that Republicans would have incentive to do it so they don’t have to vote for tax increases” and can vote for a tax cut in 2013, said Representative Joseph Crowley, a New York Democrat.
Obama and Boehner haven’t reached a deal with two weeks remaining to avert more than $600 billion in automatic spending cuts and tax increases, known as the fiscal cliff, set to start in January.
Obama is pressing for unilateral authority to raise the federal debt ceiling, while Boehner’s latest offer stipulates that “any debt limit increase would require cuts and reforms of a greater amount,” said Boehner’s spokesman, Michael Steel. Cuts of $1 trillion, as Boehner is seeking, would be about enough to cover a one-year debt limit increase.
The Congressional Budget Office has said that a failure to avert those changes would probably lead to a recession in the first half of 2013. Further, Republicans say their leverage to force spending cuts could increase in 2013 as the need approaches to increase the federal debt limit as early as mid- February.
While adverse economic effects aren’t expected to kick in right away in 2013 without a budget deal, negative market reaction may help break the legislative stalemate in the early days of the new year.
“The financial markets could end up driving a deal because that’s where the effects will be felt first,” said John Pitney, a political scientist and professor at Claremont McKenna College in Claremont, California. “If you have several days of the Dow plunging, that’s going to get a lot of attention.”
The budget debate is holding stocks hostage, as chief executive officers prepare to cut capital spending for the first time since 2009 if an agreement isn’t reached, according to more than 10,000 analyst estimates compiled by Bloomberg. Spending by Standard & Poor’s 500 Index companies will fall 1.3 percent in 2013, according to the estimates.
The S&P 500 slid 0.3 percent to 1,413.58 last week and snapped a six-day gain after Boehner said Obama’s budget plan was “anything but” balanced. The yield on the benchmark 10- year Treasury note climbed two basis points, or 0.02 percentage point, to 1.72 percent at 8:18 a.m. today New York time. It reached 1.75 percent on Dec. 14, the highest since Nov. 7.
If there’s no deal by Jan. 1 and the markets start reacting, Boehner and Obama can minimize opposition in their parties and get an agreement passed, Ron Bonjean, who was an aide to former Republican House Speaker Dennis Hastert of Illinois, said in an interview.
Waiting until January also could relieve Republicans of running afoul of an anti-tax-increase pledge that most have signed, engineered by Grover Norquist, president of the anti-tax group Americans for Tax Reform.
Boehner made his offer on the phone one day after a face- to-face White House meeting with Obama that both sides described as “frank.” The president has refused to discuss an overhaul of entitlement programs, including Medicare, until Boehner agrees to a tax rate increase for the top 2 percent of earners.
The speaker had earlier said he would consider raising revenue only by curtailing tax breaks or capping deductions for top earners.
The congressional Joint Committee on Taxation has estimated that letting the tax cuts expire for annual income exceeding $1 million would generate $366 billion less revenue over a decade than the $829 billion that Obama’s plan would collect by setting the annual threshold at $250,000.
Last week, Obama reduced his demand for revenue from tax increases to $1.4 trillion from $1.6 trillion. Lawmakers have said that the two sides must reach agreement on a framework by early this week to have enough time to advance legislation through Congress before the Christmas holiday.
If Congress doesn’t act, tax rates for income at all levels would rise next month, along with taxes on estates, capital gains and dividends.
Senate Republicans are discussing a legislative strategy for extending the tax cuts for income up to $250,000 a year. Under the scenario, the House would vote on a measure that would enact that policy as well as a separate bill that would continue the tax cuts for all income. The Senate then would approve the first bill and send it to Obama for his signature.
Democrats are banking on the idea that the public would blame Republicans if no deal is reached by year’s end.
“If they don’t come to a compromise, all the ensuing problems on Jan. 1, almost all of them, will really be on their shoulders, and I think the public knows that,” Senator Charles Schumer of New York, the chamber’s third-ranking Democrat, said of Republicans in a Dec. 13 interview.
Sixty-five percent of those polled say Obama’s Nov. 6 election victory gave him a mandate on his proposal to raise tax rates for top earners, according to a Bloomberg National Poll of 1,000 adults conducted Dec. 7-10.
Republicans say they plan to hold Obama responsible for the economic fate of the country if no deal is reached.
“It would be a wonderful thing for this president to actually own one of his boondoggles at some point in his presidency, because he has certainly had more than his share,’” Representative Trent Franks, an Arizona Republican, said in an interview.
In a $2.2 trillion deficit-cutting plan he offered earlier this month, Boehner proposed ways to trim entitlements. They included a new inflation yardstick — the so-called chained consumer price index — to reduce cost-of-living increases in Social Security. Other Republicans have advocated raising the Medicare eligibility age or raising premiums or co-payments for wealthier Medicare recipients, known as means testing.
Regarding the debt limit, Republicans demanded a dollar of spending cuts to match every dollar by which the debt ceiling was raised in 2011. Boehner has said the party will insist on a similar dollar-for-dollar spending cut in exchange for a debt- limit increase early next year.
“The debt ceiling is coming up and all this stuff is going to get tangled into one knot,” said Representative Lynn Westmoreland, a Georgia Republican.
Still, Representative Tom Reed, a New York Republican, said there remains “strong sentiment” that “we need to avert the fiscal cliff.”
“So that’s why I think I’m not as optimistic as I was a month ago, but I will be the eternal optimist,” Reed said. “It’s extremely murky here, and we’ll just have to let time take its course.”
© Copyright 2016 Bloomberg News. All rights reserved.