Week five of the fiscal-cliff negotiations came and went without any resolution, as Republicans increasingly looked for a backup plan to help them avert the fiscal cliff, save face on taxes, and give as little ground as possible politically.
As the country quickly approaches the New Year, when more than $500 billion in tax hikes and automatic spending cuts are scheduled to occur, two potential paths have emerged for the Republicans: Either the Senate will end up crafting the backbone of the compromise, or House Republicans will agree to a slight income-tax-rate increase and eagerly await the debt ceiling as the best opportunity for them enact the spending cuts they desire.
Neither option translates into a big budget agreement that tames the deficit over the long term or offers the financial markets stability. “As time goes on, the hope for a package gets smaller just because there is no time to write it, and more importantly, there is no time to talk to members to get them to vote for it,” says former Democratic House Majority Leader Dick Gephardt. “It becomes less large and simpler.”
Under option No. 1, Senate Republicans would allow the income tax cuts for the top 2 percent of earners to expire and hypothetically tick off one or two other necessary items on the lengthy fiscal-cliff To Do list such as the alternative minimum tax, according to Republican aides and tax lobbyists.
Such a bare-bones deal would allow the party to move past the impasse on taxes that it currently faces with the White House and would let President Obama claim a short-term victory on his campaign promise of taxing the rich. Politically, it also gives the Republicans an escape hatch from a situation that many Republican privately concede seems inevitable: The party agrees to some type of rate increase. Eighty-eight percent of Republicans surveyed in a recent National Journal Congressional Insiders Poll predicted that taxes on the wealthiest Americans would rise in 2013.
This plan, however, would leave several tax and spending questions unanswered, including the fate of the estate tax; the unraveling of across-the-board cuts in spending known as the sequester; the payroll-tax holiday; and the extension of the unemployment insurance benefits.
A spokesman for Senate Minority Leader Mitch McConnell dismissed talk of the senator privately plotting any side proposals. “Sen. McConnell does not advocate raising taxes on anybody or anything,” Don Stewart wrote in an e-mail. “Republicans will continue to look for ways to protect American families and jobs while strengthening entitlement programs and continuing to advocate for the types of intelligent reforms in Washington spending that the president has yet to propose.”
A McConnell-backed solution is hardly a new idea to budget and tax woes. The Senate Republican leader stepped in following the disastrous debt-ceiling negotiations in summer 2011 and helped to craft the Budget Control Act. McConnell and Vice President Joe Biden cut the lame-duck deal in 2010 to extend all of the Bush-era tax cuts. If McConnell took a leading role again at the last minute, the move would be the ultimate déjà vu of budget and tax history—though at this point, House Republicans have not signed onto or endorsed any of the Senate's ideas.
Option No. 2 for the Republicans is to cave a bit on the tax rates and then look ahead to the debt ceiling as the time of true trench warfare. The Republicans would not necessarily have to agree to the restoration of the top Clinton-era tax rate of 39.6 percent. The Obama administration seems open to raising the rate to somewhere around 37 percent or 38 percent, provided it can boast about some type of tax hike on the wealthy and hit a revenue target somewhere between $1.2 trillion and $1.4 trillion.
“I can see them [the administration] giving a little on that, but I cannot see them giving a lot,” said one source who has worked in an advisory role during the negotiations. “They have just looked too many people in the eye privately and publicly and said, ‘We’re not giving.’ ”
The advantage to Plan B is that Republicans widely think they will hold most of the leverage in February or March, once the president needs Congress to raise the debt ceiling again. At that point, the Republicans plan to fight for a commitment to deep spending cuts that, so far, has eluded them during this negotiation. That could mean cuts to Medicare in the form of raising the eligibility age or charging wealthier Medicare recipients higher premiums—ideas that McConnell has publicly endorsed.
The debt ceiling would also give House Speaker John Boehner the chance to reset the negotiations on better turf for his caucus. Or, as he told reporters this week, "The debt limit ought to be used to bring fiscal sanity to Washington."
Obama appears determined to resist a debt-ceiling showdown, telling the Business Roundtable earlier this month that he was “not going to play that game.”
But the debt ceiling seems like the light at the end of the tunnel for the Republicans now—a route in the tax fight and moment of optimism for them.
The only problem is that prolonging the fiscal battles into 2013 will consume most of the political oxygen in Washington after an already exhausting fiscal-cliff showdown, and it will leave little time for the country’s other business, from immigration reform to energy and climate policy.