Hopes dim for ‘fiscal cliff’ solution as negotiations stall

By Karoun Demirjian

Sunday, Dec. 30, 2012 | 12:08 p.m.

Sens. Harry Reid and Mitch McConnell were the last great hope for a "fiscal cliff" deal, and both pledged last week they would try to strike one by Sunday afternoon.

But now that it’s Sunday, things don’t look too promising.

Senate Democrats and Senate Republicans were scheduled to huddle in the Capitol today to discuss what everyone thought would be a budding deal at 3 p.m. EST. But with less than an hour before that meeting, Reid said that negotiations had stalled because his office couldn’t come up with a counteroffer to the Republicans.

“At this stage, we’re not able to make a counteroffer,” Reid said.

McConnell had submitted the Republicans’ latest offer to Reid around 7 p.m. Saturday night and were expecting a response by no later than 10 a.m. this morning.

“It’s now 2 p.m., and we’ve yet to receive a response to our good-faith offer,” McConnell said today on the Senate floor. “Now I’m concerned about the lack of urgency here. I think we all know we’re running out of time. There’s far too much at stake for political gamesmanship.”

McConnell noted that he’d even called Vice President Joe Biden “to see if he could help jump-start negotiations on his side,” McConnell said. The two have a longstanding relationship that dates to their days in the Senate. “I’m willing to get this done, but I need a dance partner.”

Reid didn’t question McConnell’s commitment to the negotiations but did throw water on the idea that they would yield fruit.

“I think the Republican leader has shown absolutely good faith,” Reid said, adding that he wished McConnell well in his conversations with Biden. “It’s just that we’re apart on some pretty big issues.”

Those sticking points might seem rather familiar to those who have been watching the fiscal cliff crisis unfold.

According to a Democratic aide with knowledge of the negotiations, the Republican offer McConnell made Saturday night echoed some elements of the plan President Barack Obama floated two weeks ago.

Like the president’s initial plan, McConnell suggested extending current, reduced tax rates up to income levels of $400,000, then allowing them to rise on income levels above that, and keeping unemployment benefits at their current levels. In exchange for those extensions, McConnell’s plan instructed the government to implement a cost-saving calculation of Social Security benefits, known as “chained CPI.”

Chained CPI, as opposed to the regular consumer price index, assumes that consumers make substitutions for various goods when they are on limited income. The result is that chained CPI inflates more slowly over time than the standard CPI, meaning the government pays out less in Social Security benefit checks over the long haul than they are presently anticipated to do.

But those two elements were part of a broader package under the president’s plan, which also included a deferral of sequestration cuts and increased authority for the president to raise the national debt limit. The country is perilously close to running up against that limitation on its borrowing authority.

Reid has never liked the idea of touching Social Security. After the election, Reid said Social Security was off-limits as part of a fiscal cliff deal. When the president raised the idea of linking a fiscal cliff deal to chained CPI two weeks ago, Reid held his tongue on Social Security, praising Obama for being “too generous” with his offer and refusing to comment specifically on the Social Security element of his proposal.

Today, Reid made plain, however, that if Social Security was part of the deal, he would not accept anything less than the president’s plan.

“We will not agree to cut Social Security benefits as part of a small or short-term agreement,” Reid said. “At some point in the negotiating process, it becomes obvious that the other side is demanding concessions the other side is unwilling to make. ... I hope we’re not there, but we’re getting real close.”

When asked why the Democratic counteroffer could not simply be to resuscitate the president’s full proposal, the aide said “we’re past that point.”

In the two weeks since Obama first floated his fuller, $400,000-threshold proposal to House Speaker John Boehner, there have been several developments. First, Boehner rejected the president’s offer. Then Boehner was unable to get his own counteroffer, a “Plan B” that would have extended current tax rates up to $1 million, past the House of Representatives.

In the days before Christmas, the president said he wanted to see Congress pass a limited package of fiscal remedies, including an extension of tax rates only up to $250,000 and an extension of unemployment benefits. Short of that, the president said Friday, Reid should bring up a bill to pass that combination and hope the Republicans don’t filibuster.

Reid already has queued up such a bill; it would be ready for a vote Monday, but there is no guarantee Republicans are ready to play along with something they see as a political gesture.

Earlier today, Obama indicated in a taped interview for "Meet the Press" that if that backup plan didn’t progress past Congress, Republicans would be at fault.

“Republicans will have to decide if they’re going to block it, which will mean that middle-class taxes do go up,” Obama said. “I don’t think they would want to do that politically, but they may end up doing it.”

Boehner released a statement a few hours after it aired decrying the president for pointing fingers.

“Americans elected President Obama to lead, not cast blame,” it read. “The president’s comments today are ironic, as a recurring theme of our negotiations was his unwillingness to agree to anything that would require him to stand up to his own party.”

Obama added that if the venture fails, Democrats would introduce new legislation to extend tax rates up to $250,000 and unemployment benefits on the first day of the next Congress, which is Thursday.

Republican support for such a plan may be far more likely in the next Congress than the current one. On Tuesday, if Congress does not enact a plan to avert the fiscal cliff, tax rates rise — eviscerating the argument that the offers and counteroffers that have been proposed will raise taxes on any subsection of the population. After Tuesday, those same plans become tax rate reducers.

If Congress takes a few days past Tuesday's deadline to iron out the fiscal cliff, it is unlikely that the country would feel any adverse economic impact. It would take months for the full effect of the fiscal cliff to take effect; in the meantime, it still would take weeks before higher tax rates are reflected in 2013 paychecks. Finally, the increased revenue-on-paper that a technical “fall” off the fiscal cliff will bring to the federal government ought to extend the government’s projected borrowing ability under the current debt ceiling threshold.