Democrats threaten to go over ‘fiscal cliff’ if GOP fails to raise taxes

Democrats are making increasingly explicit threats about their willingness to let nearly $600 billion worth of tax hikes and spending cuts take effect in January unless Republicans drop their opposition to higher taxes for the nation’s wealthiest households.

Emboldened by signs that GOP resistance to new taxes may be weakening, senior Democrats say they are prepared to weather a fiscal event that could plunge the nation back into recession if the new year arrives without an acceptable compromise.

In a speech Monday, Sen. Patty Murray (Wash.), the Senate’s No. 4 Democrat and the leader of the caucus’s campaign arm, plans to make the clearest case yet for going over what some have called the “fiscal cliff.”

“If we can’t get a good deal, a balanced deal that calls on the wealthy to pay their fair share, then I will absolutely continue this debate into 2013,” Murray plans to say, according to excerpts of the speech provided to The Washington Post.

READ: Everything you need to know about the fiscal cliff

If the tax cuts from the George W. Bush era expire and taxes go up for everyone, the debate will be reset, Murray is expected to say. “Every proposal will be a tax-cut proposal,” according to the excerpts, and Republicans would no longer be “boxed in” by their pledge not to raise taxes.

“If middle-class families start seeing more money coming out of their paychecks next year, are Republicans really going to stand up and fight for new tax cuts for the rich? Are they going to continue opposing the Democrats’ middle-class tax cut once the slate has been wiped clean? I think they know this would be an untenable political position.”

Murray’s address, set to be delivered at the Brookings Institution, is meant to influence both the Nov. 6 election and the lame-duck legislative session in November and December, when the fiscal cliff will be at hand and the fight over taxes will be in full throttle. Regardless of the election’s outcome, President Obama and the current Congress will be in office for the session.

The speech comes less than a week after Obama assured Hill Democrats during a White House meeting that he would veto any attempt to maintain the Bush tax cuts on income over $250,000 a year, according to several people present. It also echoes the dismissive response by Senate Majority Leader Harry M. Reid (D-Nev.) to Republicans seeking to undo scheduled reductions in Pentagon spending that even Defense Secretary Leon E. Panetta has said would be “devastating” to national security.

During the White House meeting, Obama never directly addressed whether he is prepared to let the new year arrive without taking action to avoid the cliff. According to the excerpts, Murray will say Monday that she hopes an agreement can be reached before then: “Democrats are willing to compromise. We just need a partner.”

Still, Democratic lawmakers emerged from the meeting invigorated for the year-end battle to preserve the Bush tax cuts solely for the middle class.

Senate Minority Leader Mitch McConnell (R-Ky.) has lambasted the Democrats’ position as an “outrageous ultimatum.”

“At a moment when the American people are reeling from the slowest recovery in modern times . . . and just five months away from the economic body blow that will result if tax rates spike, as scheduled, on January 1st, the president’s solution is to take more money away from the very business folks we are counting on to create the jobs that we need,” McConnell said in a speech Thursday on the Senate floor. “Naturally, Republicans oppose this. The way we see it, nobody should see an income tax hike right now.”

A risky strategy

The term “fiscal cliff” refers to the sharp drop in the 2013 budget deficit that would result from policies in current law. Thanks to a deal Obama cut with Republicans in 2010, the Bush tax cuts — and dozens of other tax provisions — are set to expire in December, raising taxes for virtually every U.S. household next year.

Meanwhile, during the debt-limit showdown last summer, lawmakers approved a plan to implement $110 billion in automatic spending cuts next year. A legislative “supercommittee” appointed to find an alternative deficit-reduction strategy disbanded without reaching agreement.

Republicans say Democrats are responsible for the impasse, noting that GOP members on the supercommittee offered to raise revenue through an overhaul of the tax code.

“We were on the record saying we would agree to a conventionally scored tax increase if they would clear out the tax code, make it fairer, flatter and simpler and begin to take us off the road to bankruptcy on entitlements. And they weren’t willing to do it,” said Rep. Jeb Hensarling (R-Tex.), the GOP supercommittee chairman.

Murray, who served as the panel’s Democratic chair, argues that her party was willing to tackle entitlement costs. But the GOP’s tax offer was a “bait and switch,” she is expected to say Monday, that would have slashed rates for the rich while generating too little cash to reduce the deficit.

With less than four months until the election, threatening to go over the cliff is a dicey political strategy. Democrats acknowledge that there is a fine line between appearing to stand firm and appearing to take unnecessary risks with the economy. Privately, some Republicans compared it to the debt-limit fight, when congressional approval ratings plummeted after conservatives risked an economy-shattering default to force cuts in government spending.

Democrats say this case is different. Unlike default, the effects of going over the cliff would be neither immediate nor permanent, aides said. An analysis by Chad Stone, an economist at the left-leaning Center on Budget and Policy Priorities, casts the cliff as more of a “slope,” with “only a fraction of the impact occur[ing] in the first month or so.”

“This is not a Wile E. Coyote moment where you have the economy plummeting on Jan. 2,” Stone wrote. “You have some time to implement policy to address the weak economy in the short term and the deficit in the long term.”

In a recent report titled “There Are Worse Fates than Walking off the Fiscal Cliff,” analysts with the Carlyle Group argued that the cliff “would be a near-term disaster” but that simply extending current tax and spending policies would fail “to address increasing indebtedness” and “could actually represent the worst long-run outcome.”

Some Republicans rethink

Given the stakes, some Republicans are rethinking their opposition to higher taxes. In recent days, Sen. John McCain (Ariz.) and other GOP defense hawks have been talking with Democrats about raising cash by “closing loopholes” to replace scheduled military cuts.

“If you said ‘John McCain, are you for increasing taxes?’ the answer is still no,” McCain said, pointing to federal subsidies for ethanol as an example of a loophole that could be closed without “raising taxes.” He added, “We get into such semantics.”

Democrats have shown little interest in a deal, however, preferring to keep the spending cuts in place as an additional point of leverage for the post-election fight.

That’s good strategy, said Erskine Bowles, the Democratic chairman of Obama’s deficit-
reduction commission, who is still trying to build support for a framework to raise taxes, overhaul entitlement programs and rein in the national debt.

“You got two guns: One is the tax cuts, and the other” is the spending cuts, Bowles said in an interview. “Until I can get a framework agreed to, I wouldn’t holster those guns,” he added.

Lori Montgomery covers U.S. economic policy and the federal budget, focusing on efforts to tame the national debt.
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