Washington – With just hours to go before the U.S. falls off the so-called "fiscal cliff," Republicans and Democrats remained divided over taxes and spending, raising the prospect that markets will start 2013 without a clear idea of America's budget policy.
The main sticking point appears to be what level of taxes are imposed on higher incomes.
The White House and Senate Republicans spent most of Sunday sorting through stubborn disputes over taxing the wealthy and cutting the budget to pay for Democratic spending proposals.
Senate Minority Leader Mitch McConnell, R-Ky., spoke repeatedly to Vice President Joe Biden, a former Senate colleague, in hopes of settling remaining differences and clinching a breakthrough that has evaded the two sides since President Barack Obama's November re-election.
In one indication of the eleventh-hour activity, aides said the president, Biden and top administration bargainer Rob Nabors were all working late at the White House, and McConnell was making late-night phone calls as well.
Unless an agreement is reached and approved by Congress by the start of New Year's Day, more than $500 billion in 2013 tax increases will begin to take effect and $109 billion will be carved from defense and domestic programs. Though the tax hikes and budget cuts would be felt gradually, economists warn that if allowed to fully take hold, their combined impact — the so-called fiscal cliff — would rekindle a recession.
"There is still significant distance between the two sides, but negotiations continue," Senate Majority Leader Harry Reid, D-Nev., said shortly before the Senate ended an unusual Sunday session. "There is still time to reach an agreement, and we intend to continue negotiations."
The House and Senate planned to meet Monday, a rarity for New Year's Eve, in hopes of having a tentative agreement to consider. Yet despite the flurry of activity, there was still no final pact.
"This whole thing is a national embarrassment," Sen. Bob Corker, R-Tenn., said Monday on MSNBC, adding that any solution Congress would swallow at this late stage would be inconsequential. "We still haven't moved any closer to solving our nation's problems."
In a move that was sure to irritate Republicans, Reid was planning — absent a deal — to force a Senate vote Monday on Obama's campaign-season proposal to continue expiring tax cuts for all but those with income exceeding $200,000 for individuals and $250,000 for couples.
Attached to the measure —which the GOP seemed likely to block— would be an extension of jobless benefits for around 2 million long-term unemployed people. The plan was described by Sen. Richard Durbin of Illinois, the chamber's No. 2 Democrat.
In one sign of movement, Republicans dropped a demand to slow the growth of Social Security and other benefits by changing how those payments are increased each year to allow for inflation.
Obama had offered to include that change, despite opposition by many Democrats, as part of earlier, failed bargaining with House Speaker John Boehner, R-Ohio, over a larger deficit reduction agreement. But Democrats said they would never include the new inflation formula in the smaller deal now being sought to forestall wide-ranging tax boosts and budget cuts, and Republicans relented.
"It's just acknowledging the reality," Sen. Susan Collins, R-Maine, said of the GOP decision to drop the idea.
There was still no final agreement on the income level above which decade-old income tax cuts would be allowed to expire. While Obama has long insisted on letting the top 35 percent tax rate rise to 39.6 percent on earnings over $250,000, he'd agreed to boost that level to $400,000 in his talks with Boehner. GOP senators said they wanted the figure hoisted to at least that level.
Senators said disagreements remained over taxing large inherited estates. Republicans want the tax left at its current 35 percent, with the first $5.1 million excluded, while Democrats want the rate increased to 45 percent with a smaller exclusion.
The two sides are also apart on how to keep the alternative minimum tax from raising the tax bills of nearly 30 million middle-income families and how to extend tax breaks for research by business and other activities.
Republicans insist that budget cuts be found to pay for some of the spending proposals Democrats were pushing.
These include proposals to erase scheduled defense and domestic cuts exceeding $200 billion over the next two years and to extend unemployment benefits. Republicans complained that in effect, Democrats would pay for that spending with the tax boosts on the wealthy.
"We can't use tax increases on anyone to pay for more spending," said Sen. Kay Bailey Hutchison, R-Texas.
Both parties also want to block an immediate 27 percent cut in reimbursements to doctors who treat Medicare patients. Republicans wanted to find savings from Obama's health care bill as well as from Medicare providers, while Democrats want to protect the health care law from cuts.
Both sides agree that a temporary 2-percentage-point cut in the Social Security payroll tax was likely to expire. That reduction — to 4.2 percent — was initiated by Obama two years ago to help spur the economy and has meant $1,000 annual savings to families earning $50,000.
A senior defense official said if the spending cuts were triggered, the Pentagon would soon begin notifying its 800,000 civilian employees to expect furloughs — mandatory unpaid leave, not layoffs. It would take time for the furloughs to be implemented, said the official, who requested anonymity because the official was not authorized to discuss the preparations.
Based on reporting by The Associated Press.