Sources: ‘Fiscal cliff’ deal emerging

By Ben Feller and Julie Pace, Associated Press

Published Monday, Dec. 31, 2012 | 9:54 a.m.

Updated Monday, Dec. 31, 2012 | 12:20 p.m.

WASHINGTON — Working with Congress against a midnight deadline, President Barack Obama said Monday that a deal to avert the "fiscal cliff" was in sight but not yet finalized. The emerging deal would raise tax rates on family income over $450,000 and individual income over $400,000 a year, increase the estate tax rate and extend unemployment benefits for one year.

"There are still issues left to resolve but we're hopeful Congress can get it done," Obama said at a campaign-style event at the White House. "But it's not done."

In the building New Year's Eve drama, the parties still were at an impasse over whether to put off the automatic, across-the-board spending cuts set to take effect at the beginning of the year and if so, how to pay for that.

One official said talks were focused on a two-month delay in the across-the-board cuts but negotiators had yet to agree on about $24 billion in savings from elsewhere in the budget. Democrats had asked for the cuts to be put off for one year and be offset by unspecified revenue.

The president said that whatever last-minute fixes are necessary, they must come from a blend of tax revenue and constrained spending, not just budget cuts.

And a little more than an hour after Obama spoke, Senate Republican leader Mitch McConnell said it was time to decouple the two major issues.

"We'll continue to work on smarter ways to cut spending, but let's not let that hold up protecting Americans from a tax hike that will take place in about ten hours," he said.

Officials emphasized that negotiations were continuing and the emerging deal was not yet final. And a confident Obama, flanked by cheering middle class Americans in a White House auditorium, jabbed Congress, saying lawmakers were prone to last-minute delays.

"One thing we can count on with respect to this Congress is that if there's even one second left before you have to do what you're supposed to do, they will use that last second," he said.

Speaking shortly afterward on the Senate floor, Sen. John McCain said that "at a time of crisis, on New Year's Eve...you had the president of the United States go over and have a cheerleading, ridiculing-of-Republicans exercise." The Arizona Republican lost the 2008 presidential race to Obama.

Unless an agreement is reached and approved by Congress at the start of the New Year, more than $500 billion in 2013 tax increases will take effect immediately and $109 billion in cuts will be carved from defense and domestic programs

Though the tax hikes and budget cuts would be felt gradually, economists warn that if allowed to fully take hold, their combined impact — the so-called fiscal cliff — would rekindle a recession.

The current proposal in the works would raise the tax rates on family income over $450,000 and individual income over $400,000 from 35 percent to 39.6 percent, the same level as under former President Bill Clinton. Also, estates would be taxed at 40 percent after the first $5 million for an individual and $10 million for a couple, up from 35 percent to 40 percent.

Unemployment benefits would be extended for one year. Without the extension, 2 million people would lose benefits beginning in early January.

A Republican official familiar with the plans confirmed the details described to The Associated Press.

The officials requested anonymity in order to discuss the internal negotiations.

The president said his hopes for a larger, more sweeping deal have been dashed and said that such an accommodation was not possible "with this Congress at this time."

But even with this fight not finished, Obama warned Republicans, specifically, about the battles still ahead. He said he would not accept any debt-reduction deals in the new year that rely on slashing spending without raising taxes, too. Cuts alone won't happen anymore "at least as long as I'm president, and I'm going to be president for the next four years."

Urgent talks were continuing Monday afternoon between the White House and congressional Republicans, with longtime negotiating partners Vice President Joe Biden and Senate Republican leader Mitch McConnell at the helm. Underscoring the flurry of activity, another GOP aide said the two men had conversations at 12:45 a.m. and 6:30 a.m. Monday.

An agreement on the proposed deal would also shield Medicare doctors from a 27 percent cut in fees and extend tax credits for research and development, as well as renewable energy.

The deal would also extend for five years a series of tax credits meant to lessen the financial burden on poorer and middle-class families, including one credit that helps people pay for college.

The deal would achieve about $600 billion in new revenue, the officials said.

Despite the progress in negotiations, Senate Majority Leader Harry Reid warned that time was running out to finalize the deal.

"Americans are still threatened with a tax hike in just a few hours," said Reid, D-Nev., as the Senate began an unusual New Year's Eve session.

Liberal Sen. Tom Harkin, D-Iowa, took to the Senate floor after Reid to warn Democratic bargainers against lowering levies on large inherited estates and raising the income threshold at which higher tax rates would kick in.

"No deal is better than a bad deal. And this look like a very bad deal the way this is shaping up," said Harkin.

Letting tax rates rise for couples with incomes of $450,000 a year is a concessions for Obama, who campaigned for re-election on a pledge to set the levels at $200,000 for individuals and $250,000 for couples. It also marked a significant concession by Republican leaders who pledged to continue the George W. Bush-era tax cuts for all income earners. .

The hope of the White House and lawmakers was to seal an agreement, enact it and send it to Obama for his signature before taxpayers felt the impact of higher income taxes or federal agencies began issuing furloughs or taking other steps required by spending cuts.

Regardless of the fate of the negotiations, it appeared all workers would experience a cut in their take-home pay with the expiration of a two-year cut in payroll taxes.

In a move that was sure to irritate Republicans, Reid was planning — absent a deal — to force a Senate vote Monday on Obama's campaign-season proposal to continue expiring tax cuts for all but those with income exceeding $200,000 for individuals and $250,000 for couples.

As the New Year's Eve deadline rapidly approached, Democrats and Republicans found themselves at odds over a host of issues, including taxing large inherited estates. Republicans wanted the tax left at its current 35 percent, with the first $5.1 million excluded, while Democrats wanted the rate increased to 45 percent with a smaller exclusion.

The two sides were also apart on how to keep the alternative minimum tax from raising the tax bills of nearly 30 million middle-income families and how to extend tax breaks for research by business and other activities.

Republicans were insisting that budget cuts be found to pay for some of the spending proposals Democrats were pushing.

These included proposals to erase scheduled defense and domestic cuts exceeding $200 billion over the next two years and to extend unemployment benefits. Republicans complained that in effect, Democrats would pay for that spending with the tax boosts on the wealthy.

"We can't use tax increases on anyone to pay for more spending," said Sen. Kay Bailey Hutchison, R-Texas.

Associated Press writers David Espo, Andrew Taylor, Alan Fram and Josh Lederman contributed to this report.