White House weighs new ‘grand bargain’ on taxes, spending

The members of the 113th Congress will soon be struggling with the same issues as the old Congress -- from spending, to gun control, to immigration reform.

The White House is eyeing a return to elements of a “grand bargain” it tried to reach late last year with House Speaker John A. Boehner (R-Ohio) as perhaps the best hope of defusing a fresh threat to the U.S. economy in just two months, according to people familiar with the discussions.

As planning begins for the next phase of Washington’s fiscal wars, attention is turning to a strategy for avoiding deep automatic cuts to domestic and defense spending and averting a government default — which could all hit at the same moment.

Democratic and Republican officials say they could build on the grand bargain talks, which looked at raising new revenue through an overhaul of the tax code and reducing spending, including on Medicare, Social Security and other entitlement programs.

As in the earlier negotiations, however, there remain sticking points. How much new tax revenue would Republicans accept, especially now that tax rates on the wealthy are already climbing under the “fiscal cliff” agreement? And how far will President Obama go in meeting the GOP demand for deep spending cuts?

Obama and Boehner came tantalizingly close last month to a broad deal aimed at stabilizing the federal debt. But the speaker abandoned the talks, saying that the White House offer was too heavy on taxes and too light on spending cuts. Instead, Democrats and Republicans reached a far more modest agreement to avoid the fiscal cliff.


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Republicans say they have a stronger hand in the new negotiations because of the federal government’s pressing need to increase its $16.4 trillion borrowing limit. The government hit the debt ceiling this week, and the Treasury Department warns it will be unable to pay its bills in about two months unless it can borrow more. Congressional Republicans say they will not vote to raise the debt ceiling unless there is a deal to make steep spending cuts.

White House officials insist that the government must meet its obligations, and thus raising the debt ceiling is nonnegotiable. Some Democrats, however, say that the bargaining advantage has shifted toward the GOP.

White House officials still believe that the framework previously discussed by Obama and Boehner offers ample scope for a deal to avoid the automatic spending cuts, known as a sequester, according to people familiar with the discussions. Such an agreement, they say, could yield legislation that would also raise the debt ceiling.

Privately, some Republicans are not opposed to the approach. The GOP is “generally open to the framework, but the devil is in the details,” said one Republican leadership aide. The aide noted that Rep. Dave Camp (R-Mich.), chairman of the House Ways and Means Committee, already intends to seek tax-code reform this year.

Still, the GOP plans to press its case that the time to discuss increasing taxes is over and the focus now must be on cutting spending. At a closed meeting Friday, Boehner told House Republicans that any increase in the debt limit must be accompanied by spending cuts and reforms of a greater amount, according to a person in the room.

During the negotiations between Obama and Boehner, the president offered about $900 billion in spending cuts, including $600 billion to entitlement programs such as Medicare. Obama has also been willing to adopt a less-generous measure of inflation in calculating Social Security payments.

At the same time, Obama insists tax revenue must be further increased in exchange for spending cuts. The bill approved by Congress this week raised slightly more than $600 billion of revenue over 10 years by raising tax rates. Obama now wants to raise about $600 billion more by limiting tax breaks.

The discussion of a new grand bargain would center on replacing the sequester, which is set to slice domestic and military spending by $1.2 trillion over a decade. While a budget agreement could also include an increase in the debt ceiling, Obama had said he will not explicitly trade anything for that increase.

“He’s willing to have negotiations on further long-term deficit reduction and he’s willing to do that in a balanced way,” said Rep. Chris Van Hollen (D-Md.), a White House ally. “The context of the discussions will be in terms of replacing the sequester.”

Republicans, however, say they will put the debt limit at the center of negotiations and are willing to shut down the federal government in March, when a resolution funding it expires.

“The coming deadlines will be the next flash points in our ongoing fight to bring fiscal sanity to Washington,” Sen. John Cornyn (R-Tex.) said Friday. “It may be necessary to partially shut down the government in order to secure the long-term fiscal well-being of our country, rather than plod along the path of Greece, Italy and Spain.”

Some Democrats say they are worried that Obama may have relinquished the upper hand by failing to raise the debt ceiling as part of the fiscal cliff deal.

“By not insisting that the debt limit be tied that to the package, it’s entirely possible they’re going to win the week and lose the quarter,” former Obama budget director Peter R. Orszag said on CNBC on Thursday. “You don’t know yet until you see how February and March plays out, and I think there’s no doubt that they have somewhat less leverage than they did in the round just completed.”

White House officials said this week they expected to prevail on the debt limit issue in part because the sequester is noxious to GOP priorities, such as preserving defense spending. As a result, the thinking goes, Republicans would not demand dramatic cuts in exchange for raising the debt limit.At the same time, Democrats noted that some of their priorities, such as Medicaid, the health-care program for the poor, are exempt from the sequester.

And if Republicans do resist an increase in the debt ceiling, the White House plans to attack them for risking an economic calamity in an effort to slice the highly popular Medicare program, according to people familiar with the matter.

Scott Wilson and Peter Wallsten contributed to this report.

Sign up for The Showdown, a daily guide to Washington negotiations over the fiscal cliff.

Zachary A. Goldfarb is a staff writer covering the White House, focusing on President Obama’s economic, financial and fiscal policy.
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