WRAPUP 3-Tax disagreements in budget, debt limit talks

Thu May 12, 2011 6:43pm EDT

Related Topics

* White House cites progress in negotiations

* Republicans say disagreement over taxes

* Bernanke warns against delaying debt limit increase

By Richard Cowan

WASHINGTON, May 12 (Reuters) - White House-led negotiations to reduce massive U.S. budget deficits and raise the United States' credit limit laid bare deep divisions on Thursday over whether tax increases could be part of any solution.

Vice President Joe Biden, who heads a deficit-reduction working group including key members of Congress, said the talks were difficult, but "we're actually making progress."

After a promising start last week in which Republican leaders spoke of finding common ground over short-term budget savings while leaving more contentious issues for after 2012 elections, the discussions became more difficult as negotiators got down to specifics.

Senate Republicans reiterated in talks with President Barack Obama there was a need to raise the national debt ceiling, the White House said. The news cheered investors who fear hang-ups over deficit-reduction will spoil chances of promptly increasing the congressionally set $14.3 trillion cap on government borrowing. That cap will be hit on Monday.

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For full debt ceiling coverage [ID:nUSBUDGET]

Debt limit debate to stretch to July [ID:nN09265886]

FACTBOX-Treasury's debt limit delay tools [ID:nN09266402]

Q+A-State of play in debt, deficit talks [ID:nN09265882]

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U.S. public debt outstanding versus debt ceiling since 1970

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But it wasn't all good news.

Following Obama's meeting with Senate Republicans, Senator Tom Coburn said "there was not a lot of agreement." Asked to explain the differences, he said, "Taxes and how you fix Medicare," the healthcare program for the elderly.

The stumbling blocks, which were predictable, come as Washington faces crucial deadlines.

When the United States exhausts its legal borrowing authority on Monday, the Treasury will have to take extraordinary measures to pay bills until Aug. 2. After that date, it risks its first-ever federal government default.

Federal Reserve Chairman Ben Bernanke warned lawmakers on Thursday that if Congress is slow to increase the debt limit the result could be higher interest rates. At worst, he said, there could be "extremely dire consequences for the U.S. economy," which already suffers from a 9 percent jobless rate.

VOTER ANGER

Republicans, however, want to seize upon voter anger over the size of the federal government and budget deficits hovering around $1.4 trillion a year to win massive spending reductions -- in the trillions of dollars, House of Representatives Speaker John Boehner told the Wall Street earlier this week.

White House economic adviser Austan Goolsbee said cutting trillions from spending was "insane," but Boehner hit back on Thursday, telling reporters, "What we ... are asking for isn't radical."

He declined to offer details on his timeframe for achieving those cuts.

Tax policy could be the hot-button issue for weeks to come, as negotiations are expected to extend at least into July. Republicans have repeatedly said tax increases are off-limits in the deficit-reduction/debt limit talks.

OIL AND TAXES

Obama has outlined tax initiatives he wants to include in budget and debt limit negotiations: The repeal of some tax breaks for the five major oil companies amid tens of billions in company profits; ending former President George W. Bush's tax breaks for those earning over $250,000 a year, and some automatic tax increases over the longer term if deficit-cutting efforts sputter.

Republicans have said they are willing to look at revamping the tax code, including closing wasteful loopholes. That is a huge effort, however, that cannot be handled in the pressing debt limit negotiations. As for repealing Big Oil's tax breaks, Republicans argue that should be debated in the broad tax reform effort later.

Biden said all issues remained on the negotiating table, including Medicare, which both sides agree needs to be reformed -- but not on how to do it. Talk of large benefit cuts, as Republicans have proposed, has triggered a public backlash.

Biden said his high-level meetings with lawmakers will resume after the House returns from a one-week break. In the meantime, aides will continue negotiating. (Additional reporting by Thomas Ferraro, Donna Smith and Jeff Mason; Editing by Philip Barbara and Todd Eastham)

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