Obama approaches 'fiscal cliff' days after victory

Obama to address 'fiscal cliff,' setting tone for negotiations with Republicans

Associated Press
Obama approaches 'fiscal cliff' days after victory
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Speaker of the House John Boehner, R-Ohio, talks about the elections and the unfinished business of Congress, at the Capitol in Washington, Wednesday, Nov. 7, 2012. The first post-election test of wills could start next week when Congress returns from its election recess to deal with unfinished business — including a looming "fiscal cliff" of $400 billion in higher taxes and $100 billion in automatic cuts in military and domestic spending to take effect in January if Congress doesn't head them off. Economists warn that the combination could plunge the nation back into a recession. (AP Photo/J. Scott Applewhite)

WASHINGTON (AP) -- With tough decisions looming to avoid the so-called fiscal cliff, House Speaker John Boehner made it clear Friday that he's leaving it to President Barack Obama to make the first move.

Obama has been adamant that taxes have to be raised on wealthy Americans — a sticking point with Republicans who say it would hurt job creation.

Boehner declined to provide specific proposals to avert the set of tax increases and automatic spending cuts due to hit in January that economists warn could cripple the economy. The Ohio Republican said he's unwilling to raise tax rates on upper-income earners and any deal should revise the tax code to lower rates and eliminate some tax breaks.

"I'm proposing that we avert the fiscal cliff together in a manner that ensures that 2013 is finally the year that our government comes to grips with the major problems that are facing us," Boehner said in a news conference Friday at the Capitol. He said cuts to Medicare, Medicaid and food stamps, known as entitlement programs in Washington-speak, have to be part of the equation.

Boehner also indicated that raising the debt limit, which the government will reach sometime in the spring, should be part of any negotiations. But pressed for more details beyond that framework, he said he didn't want to limit ideas to address the problem. He punted to Obama.

"This is an opportunity for the president to lead," Boehner said as he opened his appearance. He repeated a version of that phrase four times during the 11 minutes he spoke. "This is his moment to engage the Congress and work toward a solution that can pass both chambers."

Boehner said he and Obama had a brief and cordial conversation earlier this week on the need to avert the fiscal cliff. The president planned to address the matter Friday afternoon in a statement from the White House.

Obama faces a tough, core decision: Does he pick a fight and risk a prolonged impasse with Republicans or does he rush to compromise and risk alienating Democrats still celebrating his victory?

Many of his Democratic allies hope Obama will take a hard line. Republicans warn that a fight could poison efforts for a rapprochement in a bitterly divided Capitol and threaten his second-term agenda.

Obama has been silent since his victory speech early Wednesday morning, but Capitol Hill Republicans have filled the vacuum with vows to stand resolutely against any effort by the president to fulfill a campaign promise to raise rates on family income over $250,000 to Clinton-era levels.

"The problem with raising tax rates on the wealthiest Americans is that more than half of them are small business owners," Boehner said. "We know from Ernst & Young, 700,000 jobs would be destroyed. We also know that it would slow down our economy."

A lot is at stake. A new Congressional Budget Office report on Thursday predicted that the economy would fall into recession if there is a protracted impasse in Washington and the government falls off the fiscal cliff for the entire year. Though most Capitol-watchers think that a long deadlock is unlikely, the analysts say such a scenario would cause a spike in the jobless rate to 9.1 percent by next fall.

Some analysts believe that the fiscal cliff is more like a fiscal slope and that the economy could weather a short-term expiration of the Bush-era tax cuts and that the government could manage a wave of automatic spending cuts for a few weeks. But at a minimum, going over the fiscal cliff would mean delays in filing taxes and obtaining refunds and would rattle financial markets as the economy struggles to recover.

The CBO analysis says that the cliff — a combination of automatic tax increases and spending cuts — would cut the deficit by $503 billion through next September, but that the fiscal austerity would cause the economy to shrink by 0.5 percent next year and cost millions of jobs.

The new study estimates that the nation's gross domestic product would grow by 2.2 percent next year if all Bush-era tax rates were extended and would expand by almost 3 percent if Obama's 2 percentage point payroll tax cut and current jobless benefits for the long-term unemployed were extended as well.

All sides say that they want a deal and that now that the election is over everyone can show more flexibility than in the heat of the campaign.

On Thursday, Sen. Chuck Schumer, D-N.Y., hinted Democrats might show some flexibility on demands to increase the top income tax rate from 35 percent to 39.6 percent for upper-income earners — provided the middle class doesn't bear the burden by curbing tax breaks to pay for it.

"If you kept them at 35 it's still much harder to do, but obviously there is push and pull and there are going to be compromises," Schumer said. "The president's view, my view and the overwhelming view that we ran on, and succeeded on, and the exit polls show that the American people agreed with us on is let the rate go to 39.6 for the highest-end people."

The current assumption is that any agreement would be a multistep process that would begin this year with a down payment on the deficit and on action to stave off more than the tax increases and $109 billion in across-the-board cuts to the Pentagon budget and a variety of domestic programs next year.

The initial round is likely to set binding targets on revenue levels and spending cuts, but the details would probably be enacted next year.

While some of that heavy work would be left for next year, a raft of tough decisions would have to be made in the next six weeks. They could include the overall amount of deficit savings and achieving agreement on how much would come from revenue increases and how much would be cut from costly health care programs, the Pentagon and the day-to-day operating budgets of domestic Cabinet agencies.

Democrats are sure to press for a guarantee that tax reform doesn't end up hurting middle-income taxpayers at the expense of upper-bracket earners. Republicans want to press for corporate tax reform and a guarantee that the top rate paid by individuals and small businesses goes down along the way.

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