Budget deal will need taxes, some Republicans say

WASHINGTON Wed Nov 9, 2011 6:48pm EST

U.S. Senator Tom Coburn (R-OK) addresses the Reuters Washington Summit in the Reuters newsroom in Washington, November 9, 2011. REUTERS/Jonathan Ernst

U.S. Senator Tom Coburn (R-OK) addresses the Reuters Washington Summit in the Reuters newsroom in Washington, November 9, 2011.

Credit: Reuters/Jonathan Ernst

WASHINGTON (Reuters) - Republicans will have to accept significant tax increases in order to strike a budget deal that also reins in health and retirement costs, two prominent Republican senators said on Wednesday.

While members of a deficit-cutting "super committee" struggle to reach consensus before a November 23 deadline, Republican senators Lamar Alexander and Tom Coburn told the Reuters Washington Summit that nearly half of the Senate is pushing for an approach that would cause pain for both sides.

In one sign that super committee negotiators were following that path, Democrats have proposed capping the top income tax rate at no higher than current levels of 35 percent.

The proposal, obtained by Reuters, marks a significant shift that would abandon the party's long-standing efforts to put the rate on the highest income earners back to the 39.6 percent level that was in effect in the 1990s, before Bush-era across-the-board tax cuts were enacted in 2001.

The proposal was part of a Democratic plan that suggested $1 billion in additional spending cuts, $1 billion in new revenues -- partially through comprehensive tax reforms -- and $300 billion in savings from lower interest payments.

The Democratic plan has been rejected by Republicans, but Alexander said the Republican rank-and-file could back a compromise that included new revenues as long as Democrats showed flexibility as well.

"There's an obvious path ahead and that is for Republicans to put more revenues on the table and Democrats to put more entitlements on the table," said Alexander, who is stepping down from his post as the chamber's No. 3 Republican.

The two long-time senators, who are not members of the super committee, have developed a reputation for independence in their years in Washington.

Their proposal puts them at odds with Republican leaders who have said any deal cannot lead to a net tax increase.

Republican negotiators on the 12-member committee floated a plan on Tuesday that they said would have generated more tax revenues for the government by closing tax breaks, the first time they had put such a plan forward. Democrats said it was insufficient.

The No. 2 Democrat in the Senate told Reuters that he saw progress in the latest back-and-forth.

"I believe the fact that Republicans have mentioned the word 'revenue' is a breakthrough," said Democratic Senator Richard Durbin, a liberal who has worked with conservatives like Coburn on other deficit-cutting efforts.

The super committee is tasked with resolving a bruising, year-long budget battle that prompted Standard & Poor's to issue a first-ever downgrade of the United States' top-notch credit rating. The panel has just two weeks left to agree on a plan to cut deficits by at least $1.2 trillion over 10 years.

Taxes have been a deeply divisive issue in the budget battle, which brought the country to the brink of a debt default in August. Republicans and Democrats have struggled to bridge differences over the role of government and whether the wealthy should shoulder a greater burden of its cost.

With markets already on edge about Europe's debt crisis and the sluggish U.S. economy, failure would lead investors to question whether the United States has the willpower to tame its growing national debt.

Taking taxes off the table makes a deal more difficult, Moody's Investors Service analyst Stephen Hess told Reuters.

"A budget has two sides and looking at it from only one side is a bad way to address fiscal problems," he said at the Reuters Summit.

EYE ON 2012 ELECTION

The super committee will have to overcome political pressures that are working against a deal. Democrats and Republicans are gearing up for the 2012 presidential and congressional elections, and outside groups are lobbying hard to protect their interests.

AFL-CIO deputy chief of staff Thea Lee said at the summit the labor coalition is pushing lawmakers to reject cuts to Social Security and other benefits.

Coburn, Alexander and Durbin are among a group of 45 senators who have urged the super committee to push for a bold deal that would save $4 trillion over 10 years. Roughly 30 of them met on Tuesday to discuss how to offer encouragement.

Coburn said that the senators' point of view is not shared by Democratic and Republican party leaders, who are focused on positioning their parties for an election that could cost Democrats control of the Senate.

The super committee, which has been meeting privately, will likely need to wrap up its work within the next week in order to give budget analysts time to crunch the numbers before the November 23 deadline.

Automatic cuts to military and domestic programs would kick in if Congress does not approve the deal by December 23.

(Additional reporting by Donna Smith, Richard Cowan, Andrew Quinn, Tim Reid, Thomas Ferraro, Deborah Charles Patricia Zengerle and Susan Cornwell; editing by Ross Colvin and Jackie Frank)

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