Scenarios: How soon U.S. 'fiscal cliff' talks could unfold

WASHINGTON Tue Nov 20, 2012 12:14pm IST

Four thousand U.S. dollars are counted out by a banker counting currency at a bank in Westminster, Colorado November 3, 2009. REUTERS/Rick Wilking/Files

Four thousand U.S. dollars are counted out by a banker counting currency at a bank in Westminster, Colorado November 3, 2009.

Credit: Reuters/Rick Wilking/Files

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WASHINGTON (Reuters) - President Barack Obama and the U.S. Congress hope to start serious negotiations after this week's Thanksgiving holiday on Thursday on how to avoid the "fiscal cliff," which has politicians and economists worried about the direction of the world's largest economy.

Obama and the four Republican and Democratic leaders of the House of Representatives and Senate held their first face-to-face meeting last Friday in what was described by participants as a productive, preliminary session. They could meet again as early as next week.

Their mission: To remove the threat of $600 billion worth of tax increases and spending cuts set to begin in 2013 that could push the economy over the "fiscal cliff" and into recession.

Instead, they want to forge more reasoned, effective deficit-reduction steps.

Here are some ways the negotiations could unfold over the next month or so:

THE PLAYERS

There are five principal players: Obama, House Speaker John Boehner, the top U.S. Republican, House Democratic leader Nancy Pelosi, Senate Majority Leader Harry Reid, a Democrat, and Senate Republican leader Mitch McConnell.

Sometimes the five will have group negotiating sessions; sometimes Obama will meet with just Boehner or just Reid, for example.

Other important players include Vice President Joe Biden, who spent 36 years in Congress and worked on 2011 deficit-cutting efforts, Treasury Secretary Timothy Geithner, White House Chief of Staff Jack Lew and Rob Nabors, the White House's top liaison to Congress.

Much of the behind-the-scenes work will be done by high-level aides in Congress, who already are talking and weighing an agenda for the next leaders meeting. They include: Reid's chief of staff David Krone; Boehner's chief of staff Mike Sommers and policy director Brett Loper; McConnell deputy Rohit Kumar and Pelosi's chief of staff John Lawrence.

On tax issues, House Ways and Means Committee Chairman Dave Camp and Senate Finance Committee Chairman Max Baucus, and their respective top aides, will be in the middle of the fight. On budget issues, Senator Patty Murray, who will chair the Senate's budget panel starting next year, and Paul Ryan, the failed Republican vice presidential candidate and House Budget panel chair, will be active. Senate and House appropriations committee heads will have a say in potential cuts to specific programs.

THE MOST PRESSING CONCERNS

Scheduled tax increases totaling about $500 billion and spending cuts of $109 billion starting January 1 are the immediate worry.

Democrats have one major demand: Ending low income-tax rates for families with net incomes above $250,000. Democrats would use the new revenue from the higher taxes on the rich - around $80 billion a year - to help replace the $109 billion in across-the-board spending cuts.

Republicans likely will seek to shift some of the scheduled spending cuts away from military programs and onto so-called entitlement programs, such as Medicare healthcare for the elderly.

If Republicans agree to raise income taxes on the wealthy - something they have resisted for years - they might try to raise the $250,000 income threshold or shoot for something below the 39.6 percent top tax rate Democrats want.

If Democrats agree to "entitlement" cuts, they may try to protect middle-income beneficiaries and push higher costs onto hospitals and other providers.

Other unknowns: Will Obama and congressional leaders achieve $109 billion in deficit reduction for 2013 to match the looming $109 billion in automatic spending cuts they want to kill? Will they settle for less, as many lawmakers have suggested, or even shoot for more? Also, if the 2013 automatic spending cuts are shoved aside, will Congress also cancel the remaining nine years worth of similar spending cuts that were part of the 2011 deficit-reduction law?

THE BIGGER BATTLE

A tentative deal to avoid the December 31 "fiscal cliff" would pave the way for Congress and the White House to agree to work during 2013 on comprehensive tax reform and long-term spending cuts, including major Medicare reforms.

Congressional committees would have at least several months to come up with legislation that would then be voted on by the full House and Senate.

The size of the so-called grand bargain deficit reductions could be in the range of $4 trillion over 10 years.

THE BACKSTOP

Since Congress does not have a good track record on fiscal responsibility, the negotiators may well set up a "backstop" in case committees falter on a "grand bargain" next year or they produce legislation that is rejected by either chamber.

The backstop would force the triggering of automatic deficit reductions in the event Congress fails to act next year. If this sounds familiar that is because Congress resorted to a similar gimmick last year by creating the severe automatic spending cuts that Congress is now trying to undo. A "super committee" of lawmakers last November was supposed to have found a better alternative, but it failed.

The difference this time would be that the automatic savings would be designed to be palatable - if that is possible in the world of spending cuts and revenue increases.

THE DEADLINE

December 31 is the deadline for dealing with the expiring tax breaks and the big, automatic spending cuts. Congressional staffers have been bracing for having to toil right up until Christmas on December 25 for a deal.

But last week, Senator Reid said the initial meeting went so well that an agreement could be in hand sometime before Christmas. If the talks bog down, a Christmas Eve deal or no deal at all are possibilities.

(Reporting by Richard Cowan; editing by Christopher Wilson)

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