On eve of U.S. fiscal cliff talks, positions harden

WASHINGTON Fri Nov 16, 2012 4:04am IST

U.S. President Barack Obama acknowledges the audience's applause as he stands for Veterans Day remarks at Arlington National Cemetery in Arlington, Virginia, November 11, 2012. REUTERS/Jonathan Ernst

U.S. President Barack Obama acknowledges the audience's applause as he stands for Veterans Day remarks at Arlington National Cemetery in Arlington, Virginia, November 11, 2012.

Credit: Reuters/Jonathan Ernst

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WASHINGTON (Reuters) - As President Barack Obama and congressional leaders prepared for budget and tax talks on Friday aimed at preventing the U.S. economy from falling back into recession next year, Democrats and Republicans dug in on their long-held opposing positions.

"What we won't do is raise tax rates," Senate Republican leader Mitch McConnell warned on Thursday.

But raising income taxes on the wealthy to help shrink the deficit was exactly what Obama highlighted during his first post-election news conference on Wednesday. Twenty-four hours later, Obama spokesman Jay Carney argued that public sentiment was firmly behind the newly re-elected president.

Obama "will not sign, under any circumstances, an extension of tax cuts for the top 2 percent of American earners," Carney told reporters aboard Air Force One en route to New York to survey recent devastating storm damage.

With those tough battle lines drawn, Obama at 10:15 a.m. (1515 GMT) on Friday will bring together the four top leaders of Congress for the first time since the November 6 election.

McConnell, Senate Majority Leader Harry Reid, House of Representatives Speaker John Boehner and House Democratic leader Nancy Pelosi are scheduled to talk with him for about an hour at the White House.

"Let us go to the table in good faith that we want something to happen," Pelosi told reporters, adding, "If nothing happens, the consequences will be great."

While all five leaders have registered the need for cooperation after Democrats scored a healthy win in last week's elections, all signs point to difficult negotiations on how to avoid the "fiscal cliff" on January 1.

That is when about $600 billion worth of broad tax increases and deep spending cuts occur if Congress cannot decide how to replace them with less extreme deficit-reduction measures.

The overall push for fiscal responsibility is being fueled by budget deficits that have topped $1 trillion for each of the past four years, pushing the country's debt beyond the $16 trillion mark.

Uncertainty about the fiscal cliff prompted analysts this month to cut early 2013 U.S. economic growth expectations, a Reuters poll showed on Thursday. Investors are also rattled. The S&P 500 is down nearly 2 percent for the week, further eroding the market's 2012 gains.

The Obama-led talks begin amid growing fears there will be new demands on Washington for bailouts that could further increase deficit spending.

The U.S. Postal Service announced on Thursday a record net loss of nearly $16 billion last year, more than triple its loss the previous year.

The cleanup from East Coast wreckage brought by superstorm Sandy could require Congress to approve billions of additional dollars in aid - just as the U.S. Federal Housing Administration is indicating it might need a bailout for the first time in its 78-year history because of bad loan deals.

Much larger bailouts of U.S. financial and automotive industries a few years ago sparked outrage among many lawmakers and voters.

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In the run-up to Friday's White House gathering, Republicans and Democrats were jockeying for the upper hand in the negotiations and in public opinion.

McConnell, speaking on the floor of the Senate, said: "It's the president's turn to propose a specific plan that brings both parties together. That's what a president is elected to do."

Before the election, lawmakers speculated that if Obama won a second four-year term, he would promptly unveil a new comprehensive set of proposals for averting the fiscal cliff.

But Obama's solid win, coupled with an expanded Democratic majority in the Senate and a larger Democratic minority in the House, has caused the president to pivot, according to some Democratic congressional aides.

An emboldened Obama, the aides say, will now focus on urging Republicans to accept a Democratic bill passed in the Senate last July to extend expiring income tax cuts - first enacted by President George W. Bush - except for those families making more than $250,000 a year in adjusted income.

"If Republicans have other ideas on how to raise revenues now, they should bring them" to the White House, said one Senate Democratic aide.

While differences over raising income taxes are large, some have spotted in the week's rhetoric some openings for compromise. Those include raising Obama's $250,000 income threshold to $500,000, or letting the top income tax rate rise to something less than the 39.6 percent Obama wants, from the current 35 percent.

There is also growing talk of extending a payroll tax break for 160 million American workers to stimulate the economy by putting about $1,000 a year in extra spending power in their pockets.

The payroll tax is set to expire at year's end and will be part of the White House negotiations, leaders said.

The negotiators will also have to decide what to do about $109 billion in across-the-board spending cuts set to be triggered on January 2.

Even if Obama and Congress can forge a deal to avert the fiscal cliff by December 31, they will still have plenty of work ahead of them early next year on tax and budget policy. That is when the most arduous work is expected on revamping the outdated U.S. tax code and retooling expensive "entitlement" programs like Medicare, the government healthcare program for the elderly.

"We are open to a grand bargain - however we get to the place where we can have significant deficit reduction," Pelosi told reporters.

In the meantime, the Obama talks likely will aim for a partial solution to get the country past the cliff and into the new session of Congress that starts in January.

"The bland bargain," was how Chris Krueger, senior policy analyst at Guggenheim Washington Research Group in Washington, described it.

(Additional reporting by Kim Dixon, Rachelle Younglai, Mark Felsenthal, Thomas Ferraro and David Lawder. Editing by Fred Barbash)

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