WASHINGTON Lawmakers confronted a stark divide over taxes and healthcare on Tuesday as they struggled to reach a budget deal this week that would allow the country to continue borrowing at rock bottom rates.
Faced with the looming self-imposed deadline, Vice President Joe Biden met with a group of six Republican and Democratic lawmakers to debate how to find the trillions of dollars in budget savings that would allow Congress to sign off on further borrowing and avoid a default.
"We're slogging through some very tough issues," Democratic Representative Chris Van Hollen said after the meeting -- the first of up to four sessions this week. "Our goal is to see if by the end of the week we can reach agreement in principle, or recognize that we can't bridge our differences."
Biden left without speaking to reporters but said last week the group had tentatively agreed on a number of cuts. He had predicted tough work as negotiators try to breach the deep divide over taxes and health benefits -- two areas that could provide the biggest budget savings.
Republicans oppose tax increases, while Democrats refuse to consider cutting health benefits for retirees under the costly Medicare program.
Still, there may be room for compromise. Democrats were heartened last week when Senate Republicans backed efforts to end a tax break for ethanol, which suggested there may be some wiggle room on taxes.
Democrats are now eyeing tax breaks that benefit wealthy individuals. Those could range from curtailing interest deductions on their home loans to reduced tax rates on dividends and long-term capital gains.
The Biden group is trying to agree on how to reduce the country's budget deficits by $4 trillion over the next 10 years to give lawmakers the political cover to raise the $14.3 trillion debt ceiling by a large enough increment to cover borrowing needs through the 2012 elections.
The Treasury Department has warned the United States could default on its loans if Congress doesn't act by August 2, a scenario that could push the country back into recession and upend financial markets.
Credit rating agencies have threatened to downgrade the U.S. rating if Congress and the White House do not reach agreement on how to slash the budget deficit.
A Standard & Poor's official reiterated the warning in a speech in London, saying the risks the United States might lose its coveted AAA rating have increased as a result of the impasse over the budget.
Treasury Secretary Timothy Geithner, who has participated in the talks, predicted the group would have a deal in time so the United States can keep borrowing money to pay its bills.
"We're going to avoid a default crisis, no doubt about that," Geithner told business executives on Tuesday. But he warned that the deal must not cut spending so sharply that it harms economic growth.
Republicans want to cut domestic spending over 10 years, not just freeze it or allow it to grow along with the economy.
They have said that any debt-limit increase must be paired with a deficit-reduction package of equal size -- at least $2 trillion to ensure Congress does not have to touch the politically toxic issue again before the elections.
Some Republicans suggested that Congress may have to approve a short-term fix if the Biden group fails to reach agreement soon, which would allow more time to reach a broad deal to help ensure the budget gets under control.
But Congress does not want to have to address the issue any longer than necessary.
"I don't see how multiple votes on a debt ceiling increase can help get us to where we want to go," said House Majority Leader Eric Cantor, one of two Republicans in the talks. "We want big reforms, we want big spending cuts, and big changes to how this town works."
The group could opt for a technical change in the inflation index, which would save roughly $200 billion by slowing the growth of tax exemptions and retirement benefits.
Analysts predicted compromises on entrenched positions.
"Our guess is that some small tax increases make it into the final package as well as some Medicare and Medicaid cuts," analysts at International Strategy & Investment wrote.
(Additional reporting by Richard Cowan, Pedro Da Costa and Rachelle Younglai, editing by Jackie Frank and Christopher Wilson)