'Fiscal cliff': How far apart are the sides now on tax cut deal?

With income tax rates set to increase at midnight New Year’s Eve, the jockeying on Capitol Hill is intense. 

Negotiations broke down for hours on Sunday, after Democrats rejected a GOP proposal (later retracted) to trim Social Security payments, known as “chained CPI," but did not make a counteroffer. Senate Republican leader Mitch McConnell of Kentucky called on Vice President Joe Biden to help break the impasse.

By late Sunday, both sides appeared to have come closer together on at least one deeply divisive issue: extending the Bush-era tax cuts on all but the highest incomes.

Senate Republicans, who have opposed tax hikes, proposed preserving existing rates for a family income level of $550,000 and below, according to aides close to the talks. Senate Democrats countered with $450,000. President Obama proposes extending tax breaks only for incomes below $250,000.

All eyes were on Senate majority leader Harry Reid (D) of Nevada Monday morning, when he spoke from the Senate floor on the "fiscal cliff" talks. But he didn't tip his hand, saying "there are still some issues that need to be resolved before we can bring legislation to the floor."

Indeed, the fiscal cliff is about much more than finding a compromise on the Bush tax cuts. Just addressing taxes for the middle class – and little else – could actually take attempts to rein in federal deficits in the wrong direction. "If at the end of the day we end up with this deficit discussion adding to the deficit, many people will question our sanity," said Sen. Richard Durbin (D) of Illinois, the Senate majority whip.

These include:

• A GOP bid to keep the expiring estate tax rate at its current 35 percent rate with an exemption for estates worth less than $5 million. In a concession, Senate Democrats are allowing the issue to come to the floor for a vote.
• A Democratic proposal to extend the current 15 percent tax on dividends and capital gains, also set to expire on Jan. 1, only for middle-income families.
• A Democratic proposal to delay $109 billion in mandated spending cuts known as the sequester for a year, on the grounds that revenue from expiration of the Bush-era tax cuts will offset the cuts. Republicans call for replacing mandated spending cuts, especially in defense, with their own targeted cuts.
• A bid to extend unemployment benefits, set to fall from 99 weeks to 24 weeks, at a cost of $30 billion.
• The annual, bipartisan “doc fix,” which prevents a 27 percent cut in payments to physicians serving Medicare patients. Congress passed the measure in 1997 as part of a balanced-budget agreement to rein in Medicare costs, but soaring health-care costs made the cuts unsustainable.
• The annual “fix” for the alternative minimum tax, which Congress intended to force the wealthiest taxpayers to curb their use of tax breaks. But over time, the AMT did not keep up with inflation and is now set to hit at least 30 million families.

But even if Senate leaders can come to an agreement on a deficit-reduction deal, it would take just one senator to object to an expedited process that requires unanimous consent.

Moreover, any Senate agreement has to pass the House, where earlier this month at least 50 GOP conservatives doomed a proposal by Speaker John Boehner (R) of Ohio to set a cutoff point for extending tax breaks at $1 million.

At a Republican caucus meeting late Sunday, Mr. Boehner told lawmakers to expect to be available for votes on a Senate deal right up to noon on Jan. 3, when a new Congress is sworn in.

(Votes in both chambers on Sunday ended before the 8:34 p.m. kickoff of a decisive game between the Washington Redskins and Dallas Cowboys.)

Senators on both sides of the aisle expressed deep frustration at the process, many blaming the other side for deliberately scuttling progress.

“At some point in the negotiating process, it becomes obvious when the other side is intentionally demanding concession they know the other side’s not willing to make,” said majority leader Reid from the Senate floor midafternoon on Sunday.

“The consequences of this are too high for the American people to be engaged in a political messaging campaign,” said Republican leader McConnell, also speaking from the Senate floor Sunday.

“I rise today frustrated, embarrassed, and angry,” said Sen. Joe Manchin (D) of West Virginia. “It is absolutely inexcusable that all of us find ourselves in this place at this time, standing on the floor of the Senate in front of the American people hours before we plunge off the fiscal cliff with no plan and no apparent hope.” (Senator Manchin is proposing a Cliff Alleviation at the Last Minute Act (CALM) to ease the blow.)

In a Gallup poll released Sunday, 67 percent of respondents said that leaders should compromise on their principles and beliefs on tax increases and spending cuts to avoid the fiscal cliff. Twenty-two percent said that leaders should stick to their principles and beliefs, even if no agreement is reached by the Jan. 1 deadline.