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US Senate 'fiscal cliff' deal emerges, but not there yet

Source: Thomson Reuters Foundation - Mon, 31 Dec 2012 20:58 GMT
Author: Reuters
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* Senate leaders' proposal raises taxes, puts off spending cuts

* Obama says hopeful Congress will act before midnight deadline

* Senate Republican Leader McConnell says very close to deal

* Outlook in Republican-controlled House uncertain

By Thomas Ferraro and Jeff Mason

WASHINGTON, Dec 31 (Reuters) - U.S. Senate leaders on Monday were very close to a deal to avert the "fiscal cliff" but the compromise was heavy on tax increases and light on spending cuts, making it uncertain if rank-and-file lawmakers would back it, particularly in the House of Representatives.

With only a few hours to go before a New Year's Day deadline, President Barack Obama said agreement was within sight to prevent the worst of the fiscal crisis."

"There are still issues to resolve, but we're hopeful that Congress can get it done, but it's not done," said Obama, a Democrat, at a White House event.

The tentative Senate agreement would raise taxes on several fronts, with wealthier Americans bearing much of the burden. That might not be popular in the House where Republicans hold sway.

The planned tax increases, while substantial, would be smaller than those that will take effect automatically this week if Congress fails to brunt the full force of the fiscal cliff.

If Congress fails to act, around ${esc.dollar}600 billion in tax increases and government-wide spending cuts will begin taking effect after midnight, harsh measures that could push the U.S. economy into recession.

Under the Senate plan, those with household income above ${esc.dollar}450,000 or individual income above ${esc.dollar}400,000 would be taxed at 39.6 percent, up from 35 percent. Those with lower income would be taxed at the current, reduced tax rates put in place under former President George W. Bush.

U.S. stocks rose modestly on the news out of the Democratic-controlled Senate, with the benchmark Dow Jones industrial average up less than one percent at 13,044.

The Senate plan would also permanently fix the alternative minimum tax, or AMT, so that it does not threaten each year to sweep in millions of middle-income Americans it was not meant for. The AMT aims to ensure high-income Americans pay at least some taxes.

The Senate plan would postpone for an undetermined period the automatic, across-the-board spending cuts in defense and domestic programs that are also part of the fiscal cliff.

Senate Republican Leader Mitch McConnell said on the Senate floor he agreed with Obama that preventing the fiscal cliff tax hikes was more important than dealing with spending, for now.

"Let's pass the tax relief portion now. Let's take what has been agreed to and get moving," said McConnell of Kentucky.

ANOTHER CLIFF AHEAD?

Reaction from the Republican-controlled House to the package floated in the Senate was muted.

"We will look at the details of any emerging deal, discuss it with our members and go from there," said a spokesman for House Republican Speaker John Boehner.

California Republican Representative Darrell Issa said on CNN that Congress will have to come back and ask for more spending cuts. He said he had not seen the package yet.

Even as negotiations were continuing, Republicans already were putting Obama on notice that he faces another big battle over the next six weeks or so - the need to raise the government's borrowing authority.

"The next round of this contest is the debt ceiling fight," said Republican Senator Lindsey Graham of South Carolina.

Speaking to reporters, Graham said that when it comes time to raise the debt limit, probably around mid-February, Republicans would insist on major savings in the Social Security retirement and Medicare healthcare program for the elderly.

Specifically, he called for changing the eligibility age for senior citizens' benefits, paring cost-of-living increases for these large programs and "means testing" retirement and health benefits so that the affluent do not get the same benefits as lower-income people.

Meanwhile, Democratic Senator Sheldon Whitehouse of Rhode Island noted that in order for a bill to move quickly through the Senate, leapfrogging procedural hurdles, all 100 senators would have to cooperate. "It just takes one," Whitehouse said, holding up his index finger, to stop a bill in its tracks.

ESTATE TAX HEADED UP

The estate tax on inherited assets would increase under the Senate proposal. Corporate tax benefits would be extended, including the research and development tax credit, and unemployment insurance benefits for the long-term jobless would be extended for a year, the source said.

Dividends and capital gains would be taxed at 23.8 percent for high-income households under the Senate package. That would be an increase from the existing rate of 15 percent.

The Senate plan did not call for extending Obama's payroll tax holiday, which wage-earners have enjoyed for two years.

Support for an extension seems to have faded away, in part because the payroll tax funds Social Security. If it ends, the current 4.2 percent payroll tax rate paid by 160 million workers will rise to the previous 6.2 percent rate after Dec. 31.

If the Senate deal collapses, the tax increases that will result from plunging off the fiscal cliff could be curbed later with retroactive legislation, but some economic damage seemed likely, dependent in part on the reaction of financial markets.

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