Senate leaders and their aides spent Saturday searching for a formula to extend tax cuts for most Americans that could win bipartisan support in the Senate and final approval in the fractious House by the new year, hoping to prevent large tax increases and budget cuts that could threaten the fragile economy.
As part of the last-minute negotiations, the lawmakers were haggling over unemployment benefits, cuts in Medicare payments to doctors, taxes on large inheritances and how to limit the impact of the alternative minimum tax, a parallel income tax system that is intended to ensure the rich pay a fair share but that is increasingly encroaching on the middle class.
President Barack Obama said that if talks between the Senate leaders break down, he wanted the Senate to call an up-or-down vote on a narrower measure that would extend only the middle-class tax breaks and unemployment benefits. Senate Majority Leader Harry Reid, D-Nev., said he would schedule such a vote on Monday if a deal was not reached.
If Congress is unable to act before the new year, Washington will have effectively ushered in a series of automatic tax increases and a program of drastic spending cuts that economists say could pitch the country back into recession.
The president and lawmakers put those spending cuts in place this year as draconian incentives that would force them to confront the nation’s growing debt.
Now, lawmakers are trying to keep them from happening, though it seemed likely on Saturday that the spending cuts, known as sequestration, would be left for the next Congress, to be sworn in this week.
“We just can’t afford a politically self-inflicted wound to our economy,” Obama said Saturday in his weekly address. “The housing market is healing, but that could stall if folks are seeing smaller paychecks. The unemployment rate is the lowest it’s been since 2008, but already, families and businesses are starting to hold back because of the dysfunction they see in Washington.”
The fear of another painful economic slowdown appears to have accelerated deal making on Capitol Hill with just 48 hours left before the so-called fiscal cliff arrives. Weeks of public sniping between Reid, the Democratic leader, and Sen. Mitch McConnell of Kentucky, the Republican leader, ebbed on Friday evening with pledges of cooperation and optimism from both.
On Saturday, though, that sentiment was put to the test as 98 senators waited for word whether their leaders had come up with a proposal that might pass muster with members of both parties. The first votes in the Senate, if needed, are scheduled for this afternoon.
“It’s a little like playing Russian roulette with the economy,” said Sen. Mark Warner, D-Va. “The consequences could be enormous.”
Members of Congress were mostly absent from the Capitol on Saturday, after two days of Senate votes on other matters and a day before both chambers were to reconvene. House members were scheduled to return from their districts. However, senior aides were working on proposals in their offices or at their homes.
Speaker John Boehner stopped by the Capitol briefly to see his chief of staff on Saturday afternoon. McConnell spent much of the day in his office.
Aides to Reid were expecting to receive offers from McConnell’s staff, but no progress was reported by midday. Even if the talks were to take a positive turn, Senate aides said, no announcement was expected before the leaders briefed their caucuses today.
The chief sticking point among lawmakers and the president continued to be how to set tax rates for the next decade and beyond. Obama and Democrats have said they want tax rates to rise on income over $250,000 a year, while Republicans want a higher threshold, perhaps at $400,000.
Democrats and Republicans are also divided on the tax on inherited estates, which currently hits inheritances over $5 million at 35 percent. On Jan. 1, it is scheduled to rise to 55 percent beginning with inheritances exceeding $1 million.
Immediately — regardless of whether a deal is reached — every working American’s taxes will go up because neither party is fighting to extend a Social Security payroll tax cut that has been in place for two years.
But failure to reach a broader deal on taxes and spending would increase taxes even further, returning rates to Clinton-era levels. January paychecks would shrink as employers start withholding more for taxes.
Many families would also suffer if Congress fails to extend emergency jobless benefits, meaning that 2.1 million Americans would abruptly stop receiving expected payments.
“There’s going to be a hit to people who don’t have much capacity to absorb a hit,” said Christine L. Owens of the National Employment Law Project. “A lot of families are going to be in a bad place, not being able to pay their rent, or their mortgage, or their bills.”
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In short order, such changes are expected to dampen consumer confidence and spending, with potentially grave consequences for an economy already struggling to recover momentum.
“Every day that goes by is this needless self-flagellation,” said Stuart G. Hoffman, the chief economist of PNC Financial Services Group, who estimated that the tax increases and loss of unemployment benefits would reduce take-home pay by $9 billion a week.
The fallout would continue to worsen if the inaction and stalemate continue.
Tens of millions of families would probably be ensnared by the alternative minimum tax, increasing their 2012 tax bill and potentially throwing the upcoming tax season into disarray. This month the Internal Revenue Service warned that as many as 100 million filers — out of 150 million — could be affected. Analysts said the IRS might have to delay the start of filing season and the delivery of expected refund checks.
Come mid-January, some Medicare patients also might struggle to find doctors to treat them. Without congressional action, doctors would face two cuts to reimbursement rates: a 26.5 percent reduction in Medicare payment rates from a 1997 law, and a further 2 percent cut adopted to reduce the deficit last year.
Economists said the spending cuts and tax increases by themselves would smother the recovery. Analysts fear that the economic disruption and political flailing would spook financial markets, amplifying the pain.
“It would be a triple whammy,” said Hoffman of PNC, referring to the tax hikes, spending cuts and confidence effects. “Actually, as many whammies as you could come up with.”
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