Exclusive: budget talks get down to taxes, benefits

WASHINGTON Tue Oct 4, 2011 7:47pm EDT

Congressional Super Committee member Sen. Jon Kyl (R-AZ) carries a binder titled Budget Policy Options as he departs the inaugural meeting, as the members search for at least $1.2 trillion in new deficit reductions, in Washington, DC, September 8, 2011. REUTERS/Mike Theiler

Congressional Super Committee member Sen. Jon Kyl (R-AZ) carries a binder titled Budget Policy Options as he departs the inaugural meeting, as the members search for at least $1.2 trillion in new deficit reductions, in Washington, DC, September 8, 2011.

Credit: Reuters/Mike Theiler

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WASHINGTON (Reuters) - Deficit-reduction talks in the Congress entered a potentially groundbreaking phase on Tuesday with Republicans signaling they could consider some revenue increases in exchange for Democrats embracing healthcare cuts, sources familiar with the discussions said.

"Nearly all the Republican members on the super committee I have spoken to, and frankly the party leaders, have left the door open to revenues," a source with knowledge of the talks told Reuters.

The panel has the task of finding ways to cut the U.S. deficit by at least $1.2 trillion over 10 years. If it fails to agree on a plan by November 23, automatic spending cuts will be triggered, beginning in 2013.

"They are at a shadow boxing stage. The Democrats want to know exactly what the Republicans mean by revenues. The Republicans want to know from the Democrats what is on the table in terms of entitlement reform," the source said.

Many in Congress and in the financial community fear that the super committee negotiations could sputter if Republicans refused to sign off on tax increases, as they have in recent budget battles. That, in turn, would bring Democratic opposition to cutting the Medicare and Medicaid healthcare programs for the elderly and poor. Changes to taxes and benefit programs are two huge areas for potentially reducing deficits.

A failure by the super committee to cut a deal also could eventually lead to a U.S. government credit downgrade, similar to a recent move by Standard and Poor's. In August, it knocked the coveted AAA credit rating down by one notch after Congress and the White House feuded over borrowing authority and failed to get a multitrillion-dollar budget deal.

A Senate Republican aide said: "Revenues are being discussed," adding that both "closing loopholes and (tax) rate cuts" could ultimately be included in a package. The aide added that the super committee members are trying to craft a package that goes a little beyond the $1.2 trillion minimum in savings.

Possible revenue increases could come from ending some energy industry tax breaks or special treatment for corporate jets, for example. On the tax cut side, Republicans and Democrats have talked about reducing the corporate rate to make U.S. firms more competitive globally.

But with the negotiations in such an early stage, it was not known whether tax-hike initiatives -- long resisted by Republicans -- will ultimately succeed as Democrats hope.

Taxes and healthcare and retirement benefits will be the major issues in next year's presidential and congressional elections and lawmakers ultimately might be unwilling to make concessions so close to the November, 2012 vote.

Unlike failed deficit reduction talks led by Vice President Joe Biden in the summer, which began with areas both sides could agree on, the super committee deliberations are shaping up to be frontloaded, with Republicans and Democrats determined to start with the most difficult issues of tax and entitlement changes.

KYL STANDING FIRM

Senator Jon Kyl, a super committee member who also is the No. 2 Republican in the Senate, remains strongly opposed to any tax increases, according to one congressional aide who asked not to be identified.

Super committee members refused to comment on details of their conversations as they left a closed-door session on Tuesday. Republicans and Democrats were meeting separately later in the day, according to congressional sources who would not elaborate. Closed-door sessions are expected throughout this week.

Following the Democrats' meeting, Senator Patty Murray, a super committee co-chair, told reporters: "We're fleshing out where we need to be in order to get to a fair and balanced approach and we're making progress."

The potentially new openness to revenue increases came as some Republicans were distancing themselves from a powerful no-new-taxes force in Washington -- Grover Norquist, the head of Americans For Tax Reform.

In recent years, Norquist has been successful in getting most congressional Republicans to sign onto a "pledge" against any new taxes.

But one Republican congressional aide told Reuters, "People are ignoring Grover" now.

Meanwhile, Republican Representative Frank Wolf delivered a speech on the House floor, saying that Norquist's pledge is a "roadblock to realistically reforming our tax code" and "everything must be on the table" in efforts to get the U.S. fiscal house in order.

Failure by the super committee to agree on a comprehensive deficit reduction deal could lead to a further downgrade of the stellar U.S. government credit rating, a move that in turn could damage a global economy struggling to right itself after a deep recession.

Democrats are under pressure from liberals upset by concessions President Barack Obama offered to Republicans earlier in the year on benefit programs. This time around they are insisting that Democrats hold firm against negotiating healthcare program cuts without some movement first from Republicans on taxes.

"What we believe is most important is that the Democrats not allow the conversation move forward on programmatic cutbacks until there is clarity about what the Republicans plan to do on revenues," said Ron Pollack, who heads Families USA, a healthcare advocacy group.

(Additional reporting by Richard Cowan and Lily Kuo; Editing by Eric Walsh)

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