WASHINGTON Its entirely possible that lawmakers and the White House will reach a deal that staves off an avalanche of tax increases and deep cuts in government programs before a Jan. 1 deadline. To do so, however, theyll have to resolve deep political and fiscal disagreements that have stymied them time after time despite repeated promises to overcome them.
For many economists, corporate leaders and politicians, its unconscionable to let the government veer over the fiscal cliff, which could drain $500 billion from the still-struggling economy next year. But even President Barack Obama says it could happen.
Obviously, we can all imagine a scenario where we go off the fiscal cliff, the president said last week. The likeliest cause, he suggested, would be too much stubbornness in Congress, especially on the issue of taxes.
Many Republicans in Congress counter that its Obama who is too unyielding.
The knottiest issues facing the White House and congressional negotiators include:
Obama campaigned on a pledge to end the George W. Bush-era tax cuts for households making more than $250,000 a year. Republican leaders say the lower rates from 2001 and 2003 should remain in place for everyone, including the rich.
Both sides have dug in so deeply that it will be politically painful to back down. Republicans say tax increases on the rich would inhibit job growth. Democrats dispute that, and say its only fair for the wealthiest to provide more revenue in this era of historically low tax burdens and a growing income disparity between the rich and the poor.
Most Republican lawmakers have signed a pledge not to allow tax rates to rise, even if they are scheduled to do so by law, as are the Bush-era cuts. Some Democrats say it may be necessary to let the Dec. 31 deadline expire and have everyones tax rates revert to the higher, pre-Bush levels. Then, the argument goes, Republicans could vote to bring the rates back down for most Americans, but not the richest, without breaking their pledge.
The tax rate issue is especially thorny because it doesnt lend itself to Washingtons favorite tactics for postponing hard decisions. Lawmakers routinely resort to continuing resolutions to end budget impasses by keeping spending levels unchanged for yet another year. Politically, no one wins or loses.
Obamas campaign promise to raise tax rates on the wealthy precludes that. Either rates on the rich will rise and Republicans will absorb defeat on a huge priority, or the rates will remain unchanged, a political defeat for Obama.
Lobbies and status quo
Both parties have talked, vaguely, of raising revenue by limiting the itemized tax deductions claimed by about one-third of the nations taxpayers. Among the most popular deductions are those for charitable donations, health-care costs and mortgage-interest payments. Each is represented by muscular lobbying groups that will fight to protect the billions of dollars these tax breaks steer their way.
An array of ideas has been floated. They include capping a taxpayers total deductions at $35,000 or $50,000, and limiting the value of deductions to 28 percent, instead of the current 35 percent for high earners. The coalition of universities and other institutions that rely on tax-exempt donations is so influential that some strategists say charitable gifts should be left untouched. The housing industry says the same about home mortgage interest.
Once you put something on the table, there is enormous pushback all around, said Rep. Peter Welch, D-Vt. He says going over the fiscal cliff, at least temporarily, may be the only way to force Republicans to accept tax increases and to embolden lawmakers to make painful choices.
The last few presidential elections prove the country is almost evenly split between Democratic and Republican sentiments. But thanks to legislative gerrymandering, Americans migration patterns and other factors, many House members represent districts that are overwhelmingly conservative or liberal.
But compromise may be a ticket to defeat in their next primary election by an ideological purist from their partys fringe.
This is especially apparent among some House Republicans who say Obamas re-election victory means little to them and their constituents. GOP insiders say House Speaker John Boehner, R-Ohio, expects to lose as many as 70 of his 241 fellow Republicans on a career-defining vote on an eventual compromise package to resolve the fiscal cliff.
If Republican defections go much higher, it may be impossible for Boehner to push on without risking his speakership.
Rep. Raul Labrador, R-Idaho, is among the conservatives who seem unlikely to embrace a bipartisan compromise. We will continue to fight any member of our conference who decides this is a good time to raise taxes, he said last week.
For years, Americans have enjoyed high levels of government service at low levels of taxation, historically speaking. So the government borrows about one-third of every dollar it spends, piling up debt for future generations. Both parties often talk about cutting spending. But not much happens because constituents demand services they consider important and every government program is important to someone.
Solving the fiscal cliff is daunting, not merely because politicians must make tough decisions to raise taxes and shrink programs; these are the kinds of decisions that can get a candidate defeated. Theres also the magnitude of the unpleasantness needed to make a real dent in deficit-spending after so many years of a government free lunch.