Boehner says debt talks scaled back over tax rift

Speaker of the House John Boehner speaks about the jobs numbers during a news conference in the Capitol in Washington July 8, 2011.

WASHINGTON (Reuters) - A broad $4 trillion deal on U.S. deficit reduction appeared out of reach on Saturday as Republican leader John Boehner cited a rift with the White House on taxes and proposed pursuing a more modest package.

"Despite good-faith efforts to find common ground, the White House will not pursue a bigger debt-reduction agreement without tax hikes," Boehner, the speaker of the House of Representatives and the top Republican in Congress, said in a statement.

"I believe the best approach may be to focus on producing a smaller measure."

Boehner and President Barack Obama, who hoped to bolster his bid for re-election in 2012 with the achievement of a historic deficit-reduction package, spoke about the negotiations by phone on Saturday.

On the eve of a meeting between Obama, Boehner and other congressional leaders at the White House on Sunday, staff for both Republicans and Democrats have been working through the weekend.

Obama and Boehner had both set their sights on an ambitious $4 trillion plan, but Boehner's abandonment of the bigger goal means the negotiations will likely now focus on a package that would cut the deficit by more than $2 trillion over a decade.

An aide to Obama said the president would not back off in his efforts to solve U.S. debt problems and will make the case to congressional leaders in talks on Sunday for taking on "this critical challenge."

"We need a balanced approach that asks the very wealthiest and special interests to pay their fair share," White House Communications Director Dan Pfeiffer said in a statement.

The White House needs to secure a deal on deficit reduction to clear the way for an increase in the $14.3 trillion debt ceiling before a deadline of August 2, when the Treasury has warned the United States faces risk of a default. The White House and private economists say a default could push the United States back into recession and trigger global financial chaos.

BALKING AT TAX INCREASES

Democrats want to shield popular domestic programs from huge cuts and say that any deal must include increases in tax revenue. Many Republicans have said they would not support a package that includes any tax increases.

A $4 trillion deficit reduction plan would have involved reining in spending on the Social Security retirement program and Medicare, the government-run healthcare program for the elderly. Many in Obama's Democratic Party oppose such cuts.

Aides to Obama and Boehner were discussing revenue increases that would have been achieved in part by a streamlining of the tax code. Democrats were seeking $1 trillion in additional revenue, an increase that many rank-and-file Republicans appeared loath to support.

One Republican familiar with the deficit talks said taxes and cuts in benefit programs were both sticking points.

"The White House would not agree with the core elements of tax reform proposed by the speaker," the Republican source said. "A gulf also remains between the speaker and the White House on the issue of medium- and long-term structural reforms."

Leana Fallon, an aide to House Republican Leader Eric Cantor, said the tax increases Democrats wanted "cannot pass the House" and urged that the talks focus on a framework for between $2 and $2.5 trillion in cuts discussed in meetings led by Vice President Joseph Biden during May and June.

Democratic Representative Chris Van Hollen blamed the abandonment of a bigger deficit-reduction goal on a "Republican fixation with protecting tax breaks for corporate special interests and the very wealthy."

The Biden talks had identified savings of between $1.9 trillion and $2.7 billion. Republicans want an agreement for at least $2 trillion in cuts as the price for a debt limit increase that would be big enough to accommodate the nation's borrowing needs through the 2012 election.

But even with a scaled-back goal, it might still be difficult to resolve the differences over taxes. At a minimum, Democrats want to close enough tax loopholes to bring in $400 billion in new revenue.

Republicans want any elimination of tax breaks to be offset by cuts elsewhere.

(Additional reporting by Matt Spetalnick; Editing by Eric Walsh)