07.31.11

Debt Deal Nears

With Vice President Joe Biden as the key emissary—according to a source—Democrats and Republicans are on the verge of a deal Sunday that would cut spending by $3 trillion over 10 years. Jill Lawrence on the possible end to a months-long drama that pushed the nation near default.

Working at a feverish pace, the White House and congressional leaders tried to complete a deal Sunday that would cut spending by $3 trillion over 10 years and end a months-long drama that left the United States perilously close to defaulting on its debt for the first time in its 235-year history.

The emerging plan would cut spending and raise the debt limit in two phases, and leaders expressed cautious optimism a deal could be reached in time to avoid a default on Tuesday, though many details still remained to be worked out.

“I'm very close to being able to recommend to my members that we have an agreement here that I hope they will consider supporting,” Senate Republican Leader Mitch McConnell said on CNN's State of the Union. McConnell, who emerged as a key player in 11th-hour negotiations, said he can “pretty confidently" say that “we’ll avoid default."

Democrats in the White House and on Capitol Hill stressed that there was no agreement yet, but progress was being made. Sen. Charles Schumer, part of the Democratic leadership, said default was “far less of a possibility now than it was a day ago, but there are lots of things that are not built in and many more discussions to go.”

Vice President Joe Biden has been the main emissary in the talks, according to a Democratic aide on Capitol Hill. Other participants were McConnell, Senate Majority Leader Harry Reid, House Speaker John Boehner, and House Democratic Leader Nancy Pelosi. The proposal was being “shopped around” to members Sunday, the aide said, even as some issues remained unresolved.

Even as negotiations continued behind closed doors, the Senate came into session for a rare Sunday vote, rejecting, as expected, to move forward on a plan offered by Reid to trim the deficit by $2.4 trillion over 10 years while raising the debt limit by $2.2 trillion.

A key part of the emerging deal would ensure the debt limit is high enough to get the country past the 2012 election without another high-stakes showdown and the threat of default.

In a sign of the tricky road ahead, Reid actually voted against advancing his own plan in a procedural move, taking advantage of the chamber's parliamentary rules to keep a vehicle open in the Senate to implement the new deal if it was struck.

Reid sounded a note of cautious optimism after his own plan was defeated, telling fellow senators a new deal was "not there yet," but "we are hopeful and confident it can be done."

The big question that remained was whether the Tea Party–aligned lawmakers and fiscal conservatives inside the GOP who forced the debate to the brink of a deadline by demanding concessions would be satisfied with the latest terms. One of the fiscal conservatives, Sen. Lindsey Graham, R-S.C., remained uncommitted as the first details emerged.

Graham told ABC's This Week the new deal was a partial victory for Republicans by paying future debt increases with spending cuts but added, “from a big picture, I'm not ready to vote for this."

A key part of the emerging deal would ensure the debt limit is high enough to get the country past the 2012 election without another high-stakes showdown and the threat of default. That’s been a top priority for President Barack Obama and is viewed by some financial analysts as the only way to prevent a downgrade of the United States’ AAA credit rating.

The plan under discussion would involve two stages of raising the debt limit—one boost now and one in six months. Congress could try to block the second one, but Obama could veto a “resolution of disapproval” that crosses his desk.

Another key element is a special bipartisan committee, which would include both Senate and House members, to come up with a second stage of deficit reduction after an initial $1.2 trillion or so in cuts. The committee would have to come up with a package by Thanksgiving, and Congress would have to vote it up or down by Christmas. Otherwise broad spending cuts would be triggered.

McConnell stressed that “we’re not going to raise taxes in this deal. There’s no tax increase in this proposal.” However, Schumer said the bipartisan committee may come up with a combination of spending cuts and tax revenues if incentives to do so are strong enough and the consequences of inaction are painful enough. The mechanism would be an automatic trigger for tax hikes, spending cuts, or both if the committee doesn’t agree on a package.

McConnell and Schumer made clear that the trigger has been a major sticking point. Schumer said Democrats would like failure by the bipartisan committee to trigger higher taxes on the wealthy and/or closing tax loopholes. He also said the threat of “defense cuts of equal sharpness and magnitude to domestic cuts” in the past has brought the parties to agreement on “a balance of revenue and cuts.”

Gene Sperling, director of the National Economic Council at the White House, reiterated the administration view that more tax revenues are needed to make sure there is “shared sacrifice” by wealthy people as well as the middle class and poor. He said that “nobody is talking about raising revenues over the next year and a half”—that Obama is in fact pushing for an extension of a payroll tax cut now in effect. Over the longer term, he said a reform of the tax code could raise revenues in a way that draws bipartisan support.

McConnell agreed, saying reforming the tax code could be a key component of the work left for the bipartisan committee of Congress.

"Well, they are going to have a broad mandate to look across the federal government, including tax reform, which virtually every Republican I know thinks is a good idea, to tackle tax reform. The president also wants to tackle tax reform. They can do that. We fully expect them to deal with entitlement reform," McConnell said.

The issue of taxes has been particularly sensitive in Congress. Democrats want to close tax loopholes that benefit the rich and corporations like oil firms, and Republicans are resisting because many have signed no-new-tax pledges and are worried new taxes will hurt job creation.