Why the latest round of debt talks ground to a halt

With the exit of GOP negotiators and collapse of the debt talks led by Vice President Joe Biden, the onus of solving America’s debt crisis falls to President Obama, House Speaker John Boehner (R) of Ohio, and Senate majority leader Harry Reid (D) of Nevada.

This punt to the top is only the latest in a series of failed bids to make the toxic political choices that are needed, as early as Aug. 2, to avoid a default on the $14.3 trillion national debt. Options on the table, each fiercely defended by one party, include trillions of dollars in spending cuts, billions in tax increases, and overhauls of iconic entitlement programs.

Mr. Biden had hoped to present a “blueprint for putting America’s fiscal house in order” by the July recess, which begins for the House on Friday. Instead, these talks derailed over the scope of spending cuts and the prospect of tax increases. Still, Biden said, the aim of the talks from the outset was to “report our findings back to our respective leaders.”

“The next phase is in the hands of those leaders, who need to determine the scope of an agreement that can tackle the problem and attract bipartisan support,” he said in a statement Thursday. “For now the talks are in abeyance as we await that guidance.”

On Monday morning, Mr. Obama and Biden will meet with Senator Reid and, in the evening, with Senate minority leader Mitch McConnell (R) of Kentucky to discuss the status of the debt negotiations.

Previous bipartisan efforts to chart a path out of unsustainable debt also derailed over the mix of spending cuts and tax increases. The chairs of the president’s 2010 deficit commission produced a plan to cut $4 trillion over 10 years, which failed a vote by the full commission and was ignored by both Obama and Congress. Six senators launched an independent, bipartisan “Gang of Six” to implement that plan, but it hit an impasse over entitlement cuts. Sen. Tom Coburn (R) of Oklahoma, the key link to conservatives, walked out on May 17.

The Biden talks, launched on May 5, included four Democrats and two Republicans with ties to leadership. Meeting weekly, then several times a week, negotiators produced a shortlist of some $2 trillion in proposed cuts over 10 years – including agricultural subsidies, federal employee pensions, and student loans.

But Democrats said that spending cuts had to be balanced by tax increases – including the elimination of “wasteful subsidies” and corporate tax breaks, especially to oil companies and corporations that have offshored jobs. They also insisted that Social Security and, to a large extent, Medicare were off the table.

On Wednesday, Senate Democratic leaders added another element to the mix by calling on the Biden negotiators to include a jobs plan to help stimulate the economy. “Cutting is only part of the game,” Reid said at a briefing with reporters.

“We're seeking policies to build roads and bridges and dams and water systems and sewer systems, to create clean-energy jobs, to provide tax incentives for businesses to hire new employees,” he added. “They've been proven to create jobs in the past, and they have had, in the past, broad bipartisan support.”

It was a bridge too far for Republicans. But when House majority leader Eric Cantor (R) of Virginia and Senate minority whip Jon Kyl (R) of Arizona quit the talks on Thursday, they cited the dispute over tax increases and new plans for stimulus spending.

The House won’t vote to increase taxes, so taxes are off the table, said Representative Cantor, who led the walkout on Day 50 of the talks. “I believe it is time for the president to speak clearly and resolve the tax issue,” he said in a statement. “Once resolved, we have a blueprint to move forward to trillions of spending cuts and binding mechanisms to change the way things are done around here.”

Senator McConnell took to the floor after the walkout. “Most Americans had to wonder if they were dreaming this morning when they saw this headline: ‘Democrats call for new spending in US debt deal.’ More spending? As a solution to a debt crisis? What planet are they on?”

Still, Senate Republicans have taken a more conciliatory stance than their House counterparts in the Biden talks. In recent weeks, Senator Kyl said that spending and entitlement cuts could cover more than a 10-year period. And McConnell said that Republicans were open to short-term deals, if Congress can’t resolve the entire issue by Aug. 2.

House GOP leaders, on the other hand, see this moment as a historic opportunity to roll back the scope of government and set the nation on a new fiscal path. They are holding out for at least $2.4 trillion in spending cuts – the size needed to cover the increase in the debt ceiling through 2012.

House Republicans are also drawing a line on tax increases, including no cuts in corporate tax breaks unless such cuts are offset by new tax cuts elsewhere.

Yet over in the Senate, McConnell and 32 other Republicans joined Democrats in voting for a stand-alone cut in the subsidy for ethanol – a move that could open the door to including tax breaks in a blueprint for lower deficits. It's a move explicitly ruled out by the taxpayer pledge of Americans for Tax Reform, which scores members of Congress on their adherence to pledging not to raise taxes.

Rep. Chris Van Hollen (D) of Maryland, the top Democrat on the House Budget Committee and a negotiator in the Biden talks, blames this rigidity over the pledge – which requires net offsets for ending any tax loophole – as the reason for Cantor’s exit.

Cantor denies that claim. “This was not just a matter of loopholes,” said Brad Dayspring, a Cantor spokesman. “Tax increases are a nonstarter.”

He added, “The way to move forward is to have the president get involved. Eric is confident there’s a foundation there for an agreement.”

While necessary at this point, the prospect of a deal emerging from a Gang of Three at the White House is unsettling to lawmakers at both ends of the political spectrum. They fear they will be forced to accept a deal under the gun of a government shutdown.

“It will be unacceptable for the White House talks or any talks to produce a controversial decision at the 11th hour and for them to come before the Congress all in a panic and say: ‘You’ve got to pass this solution that we have come up with in secret,’ ” said Sen. Bernard Sanders (I) of Vermont, one of the Senate’s strongest liberals, in a floor speech on Thursday.

Meanwhile, 98 House Republicans and 22 GOP senators have endorsed legislation sponsored by Rep. Tom McClintock (R) of California and Sen. Patrick Toomey (R) of Pennsylvania that aims to avoid default on the national debt by requiring the Treasury to pay debt obligations before any other government expenditures.

US debt risks exceeding the size of the US economy by 2021, according to a report released this week by the Congressional Budget Office.

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