'Fiscal cliff' deal: After rush of relief, debt ceiling clash already looms

Just 10 hours before the New York Stock Exchange opened on Wednesday, the GOP-controlled House passed the Senate's "fiscal cliff" bill, 257 to 167, marking the first time that Republicans have, effectively, voted to raise income taxes in 20 years.

Markets from Tokyo to Wall Street surged at the news that Congress had, at last, resolved the fiscal cliff, some $600 billion in tax hikes and spending cuts that threatened to drive the US economy back into recession.

The vote marked a clear victory for the White House on what had been a rock-solid GOP principle: no tax increases. President Obama made that point publicly several times in the midst of tough weekend negotiations, riling GOP leaders.

But the victory could be shortlived. Sharp divisions persist over how to deal with the nation’s $16 trillion national debt and soaring deficits, which Congress and the White House must face as early as February when they reengage over raising the debt ceiling.

Moreover, the fiscal cliff deal was worked out over the strong objections of conservatives on the right of the Republican Party and liberals on the left of the Democratic Party, not fully reflected in the final vote.

The bill, which passed the House mainly with Democratic votes and over the objections of 151 Republicans, extends the Bush-era tax cuts for most taxpayers, but set $450,000 as a cut-off point for higher tax rates on earned and investment income for the richest Americans.

It also delayed implementation of the sequester – $110 billion in automatic spending cuts set to begin Jan. 2 – a key GOP demand in exchange for agreeing to increase the debt limit up to $16.4 trillion in August 2011.

Now, Congress faces another standoff with the White House on taxes, spending, and entitlement reform as early as February, when lawmakers take up a new White House request to raise the debt limit.

In a statement after the fiscal cliff vote on Tuesday, Mr. Obama said he will refuse to engage the Congress over this issue, period.

“While I will negotiate over many things, I will not have another debate with this Congress over whether or not they should pay the bills that they’ve already racked up through the laws that they passed,” he said.

“Let me repeat: We can't not pay bills that we've already incurred.  If Congress refuses to give the United States government the ability to pay these bills on time, the consequences for the entire global economy would be catastrophic – far worse than the impact of a fiscal cliff,” he added.

In fact, the national spending ran up against the debt ceiling on Dec. 31, but the Treasury has emergency measures to delay an actual breach for several weeks.

House Republicans are already shifting their focus from no tax hikes to spending cuts as their main concern.

“On spending, which is the real problem, this classic Washington deal is worse than doing nothing,” said Rep. Jim Jordan (R) of Ohio, the former head of the Republican Study Committee, the conservative wing of the House GOP caucus.

“We'll never get the budget balanced by delaying the few spending cuts that were agreed to in the summer of 2011.”

The fiscal cliff negotiations began with a strong advantage to the Obama White House: Had Congress refused to come to a deal, all the Bush-era tax cuts would automatically expire, and polls showed that the public would have blamed Republicans.

But in the next clash over debt and spending, it’s the White House that is asking to increase the debt limit. Failure to resolve differences would lead to an unthinkable default on the national debt and another downgrade of the US credit rating.

House Speaker John Boehner of Ohio began the 2011 debt-limit negotiations with a new principle he said was nonnegotiable: that is, that every dollar increase in the debt limit must be accompanied by a dollar of spending cuts. That's why Congress set up the automatic spending cuts as part of what came to be known as the fiscal cliff as a bid to force concessions on spending.

But with the two-month delay of the sequester in the fiscal-cliff bill, spending once again must be resolved in the same time frame as a high-stakes decision over raising the debt limit, whether or not the White House objects to combining the two issues.

Republicans are divided over how aggressively to push the debt-ceiling negotiations in a new round with the White House. Last month, Mr. Boehner, who is up for relection as speaker on Jan. 4, offered to defer a fight over raising the debt limit for a year, as part of negotiations with Obama over a “grand bargain.” But he has taken a battering from some conservative activist groups and members of his own caucus for those failed negotiations.

Conservative groups see the debt ceiling as a point of maximum leverage on spending and are urging Boehner to again insist on "the Boehner rule" and use it as a point of maximum leverage.

“The mass majority of Americans know the danger we’re putting ourselves in and want less debt,” says Chris Chocola, president of the Club for Growth, best known for funding primary campaigns against GOP incumbents viewed as not conservative enough.

“It’s up to Republicans to tell this story, and they have more leverage [in debt-ceiling negotiations] than they did in the fiscal cliff debate,” he adds. “If they’re not willing to go there, they have nothing.”

But after tough 2012 elections, some House Republicans are wary of confronting the White House on an issue so potentially damaging to the economy.

"A lot of people talk about the debt ceiling, but I don’t want to be messing around with the obligations of the federal government,” says Rep. Jim Renacci (R) of Ohio, a veteran of the 2010 tea party class. “We can use that for some leverage, but we should be using every opportunity to cut debt.”

“After two tough races, I did not come here to continue the status quo,” he adds.