Left out of the deal would be entitlement cuts, stimulus, tax reform, refundable tax credits, and the debt ceiling. Those would have to be taken care of in a bigger deal later.
Even with those more controversial issues excluded, the small deal posed challenges. Cutting taxes for the middle class required agreeing on the income level at which you'd raise taxes on the rich. Would it be $250,000? $400,000? $500,000? How about the taxes on capital gains and dividends? What about the AMT and the estate tax? If you turned off the sequester, would you have to pay for it somehow?
Those issues were, over the last two days, enough to make even a small deal unlikely. Republicans wanted the estate tax permanently set at Lincoln-Kyl levels, which most Democrats consider noxiously low. They wanted the tax cuts made permanent for all income under $500,000 -- a big concession for Senate Democrats who've already passed a bill that ends the Bush tax cuts for income over $250,000.
But those were, at least, predictable debates. On Saturday afternoon, however, McConnell handed Reid an offer that demanded, for the first time, that chained-CPI be part of the small deal.
If you've been following the "fiscal cliff" negotiations, you'll remember that chained-CPI was the headline concession in President Obama's final offer to Boehner: It's a sharp cut to Social Security benefits, and one that the left hates. There was no way Democrats would ever agree to it in the context of a small deal. It wasn't even clear that congressional Democrats would agree to it in the context of a big deal.
To the Democrats in the room, McConnell's offer wasn't so much a negotiating position as an escape hatch. It meant McConnell didn't think he had enough Republican support to pass the kind of small deal that Reid and McConnell had actually been negotiating. Reid didn't bother sending back a counterproposal. "At some point people looked around the room and said if you guys want chained-CPI and a $400,000 or $500,000 tax threshold and all this other stuff, why didn't you just do the deal with Obama?" said one Democratic aide.
This afternoon, Reid went down to the Senate floor to make his position explicit and public. "We're willing to make difficult concessions as part of a balanced, comprehensive agreement," he said, "but we'll not agree to cut Social Security benefits as part of a small or short-term agreement."
Both Reid and McConnell are now meeting with their members. McConnell has been speaking with Vice President Biden in the hopes that Biden can shake a deal loose. So the talks aren't over, but few are optimistic that a deal can be reached.
In the absence of an agreement, Senate Democrats will go to the floor with a bill that makes the Bush tax cuts permanent for income under $250,000, extends unemployment insurance, and prevents the automatic Medicare cuts. A number of Senate Republicans, including Olympia Snowe and Johnny Isakson, have signaled they'd support such a bill in the absence of a deal.
The question is whether McConnell would filibuster to keep the bill from coming to the floor. Over the summer, McConnell, faced with a similar dilemma, declined to block a bill making the Bush tax cuts permanent for income under $250,000. He thought then that the politics of blocking a middle-class tax cut were too damaging to the GOP. The question is whether he's changed his mind now. It's possible that while McConnell thinks it would be bad politics for Republicans to help Democrats pass a bill that cuts taxes on the middle class and raises them on the rich, it would be even worse politics for them to filibuster that bill and get blamed for the subsequent tax increase.
Update: According to reports, Senate Republicans have decided to drop their demand to include chained-CPI in the negotiations. So that makes a small deal possible again.