No "Fiscal Cliff" Deal Under The Christmas Tree

By: CBS News, Posted by Chelsey Moran
By: CBS News, Posted by Chelsey Moran

With the "fiscal cliff" looming and Washington lawmakers packing up for the holidays, President Obama late Friday appealed to lawmakers to go home, "cool off," and reflect on the need to "do the right thing" to avoid risking pushing America back into recession.

Noting that Republicans control the House, the president said, "We move forward together, or we don't move forward at all."

The comments came shortly before the president headed to Hawaii, where he plans to celebrate Christmas with his family before returning next week. House Speaker John Boehner, R-Ohio, with whom Mr. Obama spoke with this afternoon, has sent members of the House home until at least December 27, and the Senate is also leaving Washington until after the Christmas holiday.

Speaking late in the day, Mr. Obama said he was now pushing lawmakers to pass a bill that would extend the Bush-era tax rates for most Americans and extend unemployment insurance before the end of the year. Dealing with the rest of the "fiscal cliff," he suggested, would have to wait until after the deadline.

"There is absolutely no reason - none - not to protect these Americans from a tax hike. At the very least let's agree right now what we already agree on," he said.

But there is ample reason to believe even a scaled-down deal will be hard to come by. While Democrats want to extend the Bush-era tax rates, which are scheduled to expire at the end of the year, on income under $250,000, Republicans want to extend the rates for all Americans. And neither side appears willing to give enough ground to reach a compromise.

More broadly, negotiations over averting the combination of spending cuts and tax hikes known as the "fiscal cliff" lay in tatters.

How did things fall apart? Here's the short(ish) version: Mr. Obama and Boehner went back and forth with offers and counteroffers until they got pretty close to each other. In their most recent offers, depending on how you count it all up, Mr. Obama was offering roughly $1.2 trillion in revenue and $800 billion in spending cuts; Boehner was offering $1 trillion in revenue and $1 trillion in spending cuts.

Then Boehner decided to put forth his "Plan B," the most notable component of which was where he set the threshold for tax rates to rise when the Bush-era tax cuts expire at the end of the year. Mr. Obama campaigned on allowing the rates to revert to Clinton-era levels on income over $250,000, a position that a majority of Americans support; in "cliff" negotiations, he offered to set it at $400,000. Boehner's "Plan B" set that rate at $1 million.

The White House said it had been told by House Republicans that Boehner had decided to pursue "Plan B" because he realized his own latest "cliff" offer couldn't pass the House. The speaker's office dismissed that claim, but it was hard not to conclude that it had the ring of truth after what took place Thursday night.

That's when Boehner's "Plan B," which he had repeatedly cast as evidence that the GOP was putting forward a plan to avert the "cliff," fell apart. Boehner pulled the bill when a few dozen conservative House Republicans made clear they wouldn't back it because they believed it raised taxes.

It was a humiliating moment for the House speaker, and one that raised questions about whether he will hold onto his position in leadership elections early next year. It also spoke to the ways in which the system is now set up in a way that makes compromise extremely difficult.

Here's the problem: As Boehner acknowledged in his remarks Friday, House conservatives - many of whom come from deeply red, gerrymandered districts - fear that they will face a well-financed, tea party-aligned primary challenge if they vote for any sort of tax increase. And there are enough such conservatives that Boehner can't pass a compromise bill with just his caucus.

That means to get a "fiscal cliff" deal, Boehner needs to get both Democratic and Republican votes. But the deeply polarized House doesn't really work that way: Since the days of former House Speaker Dennis Hastert, R-Ill., a decade ago, House leaders have only put forth bills that have the wide support of their caucus. That has a lot to do with self-preservation: Working with the other party is an awfully good way to lose your position as the head of your caucus.

The path forward is unclear. One option is for Mr. Obama to work with Senate leaders from both parties to try to craft a bill that they could send to the House - and then hope that Boehner allows it (or a similar measure) to come up for a vote on the House floor, where it could potentially win passage with a mix of Republican and Democratic votes. Doing so could prompt a conservative member of the House to enter the leadership race against Boehner, with a vote set for January 3; since a candidate needs a majority (as opposed to a plurality) to win, that candidate could effectively deny Boehner the speakership and potentially allow an alternative, consensus candidate to emerge.

Really, though, no one knows where to go from here. Boehner's failed "Plan B" gambit effectively cost him any leverage he had in negotiations, since it made clear he did not control his caucus. Asked how a deal could be reached, Boehner said earlier today, "God only knows." He added that he is not concerned about losing his speakership.

The prospects for a potential deal through the Senate did not get off to an auspicious start this afternoon, where Senate Majority Leader Harry Reid, D-Nev., and Minority Leader Mitch McConnell, R-Ky., offered less-than-conciliatory rhetoric on the Senate floor. Reid called for the House to pass the Senate bill extending Bush-era tax rates on income under $250,000; McConnell said the Senate should pass a House bill extending the rates on all income. The Senate, like the House, is expected to come back into session on December 27. Mr. Obama and Reid met at the White House before the president's remarks today.

Further complicating matters is unrest from the Democratic base. Mr. Obama's compromise offer included a willingness to change the way inflation is calculated in Social Security and other government programs - a shift to the so-called "chained CPI." Any compromise deal will lose both conservative House Republicans and liberal House Democrats, which means the best hope is for narrow passage. The president said Friday he believes House Democrats will support what he drafts with Senate Democrats.

Barring a surprise, last-minute breakthrough, the nation is now poised to go over the "cliff." That's not quite as bad as it sounds. The "cliff" is actually a slope: The $1.2 trillion in automatic spending cuts are phased in over a decade - it's not the immediate punch to the cut that "cliff" implies - and there are budgetary maneuvers that can be taken to at least somewhat soften the blow of both the tax hikes and spending cuts. Still, going over the cliff could spook the markets and once again shake world perceptions of the ability of the U.S. government to function effectively. And if a deal is not reached by the end of January or so, the $500 billion in tax hikes and $200 billion in spending cuts in the first year will likely start pushing the nation back into recession.

The good news, as it were, is that going over the cliff would make it easier to get a deal done. At that point, the expiration of the Bush-era tax cuts will mean that taxes on nearly all Americans will go up. That could push House Republicans to back a "fiscal cliff" deal, since they would not be voting for a tax cut, not a tax hike.

One last thing: The nation is expected to reach the debt ceiling once again around February, an issue that Mr. Obama has hoped to deal with as part of a "cliff" deal. (The debt ceiling is what prompted the last big budget fight in Washington, last summer.) And going over the "cliff" means more than just an increase in tax rates and the start of spending cuts mandated as part of the 2011 debt limit agreement: It means the expiration of the payroll tax holiday, a lack of a patch for the Alternative Minimum Tax, no expansion of unemployment insurance, no expansion of the "doc fix" to keep physician Medicare reimbursements from falling and a host of other outcomes.

Or to put it another way: Washington has managed to put a big lump of coal in America's Christmas stocking. Before he left Friday, Mr. Obama said he still believed lawmakers could act to at least minimize the damage from a potential "self-inflicted wound."

"This is something within our capacity to solve," he said. "It doesn't take that much work. We just have to do the right thing. So call me a hopeless optimist, but I still think we can get it done."


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