'Fiscal cliff' focus shifts to Senate; estate tax extension emerges as key in talks

President Obama is reaching out to Senate Democrats and Republicans to strike an eleventh-hour deal to avoid the fiscal cliff, even as lawmakers grow increasingly skeptical about the likelihood of success.

Obama has invited the Democratic and Republican leaders of the Senate and House to meet at the White House on Friday to restart the stalled talks, while House Republicans have made plans to return to Washington on Sunday.

While any deal will have to win approval of both chambers, the focus of the negotiations has shifted to the Senate.

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Senate GOP Leader Mitch McConnell (R-Ky.) appeared to anticipate this shift in dynamic last week when he presided over a Senate Republican conference meeting to discuss a potential compromise on taxes, according to a Republican senator who participated.

The consensus that emerged during the meeting is that Senate Republicans could accept a deal that extends the Bush-era income tax rates for a vast majority of the populace and also extends the 35 percent tax rate on inheritances over $5 million per spouse, according to the GOP lawmaker.

Another Republican senator confirmed that such a proposal could attract a significant number of Republican votes, especially if it shifted the threshold for extending income tax rates to cover family income up to $400,000 or $500,000.

But there are obstacles. Liberal Senate Democrats may balk at the prospect of extending the estate tax in its current form. Many liberals were furious after Obama struck a deal with McConnell two years ago extending all of the Bush-era income tax rates and setting the estate tax at its current level.

Senate Republicans would be further enticed to support a package that kept dividend tax rates from rising to their pre-2003 levels. Obama’s budget proposed letting the 2003 dividend tax cut expire, which would boost the rate for married couples earning over $250,000 from 15 percent to 39.6 percent. 

Liberal Democrats such as Sen. Jay Rockefeller (D-W.Va.) declined to say whether keeping the estate tax at its current level would jeopardize their support for a deal.

“Let’s see what tomorrow brings,” he said.

But extending the inheritance tax rate at 35 percent with large exemptions could prove popular among Democratic centrists facing tough reelections in rural states, such as Sens. Mark Pryor (Ark.), Max Baucus (Mont.), Mary Landrieu (La.) and Kay Hagan (N.C.).

Pryor, Baucus and Landrieu have said they do not support the Democratic leadership’s plan to raise the rate to 45 percent and lower the exemption to $3.5 million.

Some Republicans and centrist Democrats say the biggest problem, however, remains the House. They question whether Speaker John Boehner (R-Calif.) can pass any bill that allows rates on some tax brackets to revert to Clinton-era levels.  

Liberal Democrats would be more inclined to support a compromise if it included unemployment insurance for 2 million people, which Obama called for in a statement last week.

“If the president puts something out and the Senate passes it, then the speaker is the key,” said Sen. Ben Nelson (D-Neb.).

This is why Boehner and House Minority Leader Nancy Pelosi (D-Calif.) must remain looped into the talks even though Senate Majority Leader Harry Reid (D-Nev.) and McConnell are now expected to take the lead in negotiating a compromise with Obama. All four leaders will be at the White House on Friday.

Boehner told Republican colleagues during a conference call Thursday the House had acted on two bills to avoid the so-called fiscal cliff and that it is now up to the Senate to act.

One of the House-passed bills would extend all of the Bush-era tax rates; the other would replace automatic spending cuts known as the sequester with other reductions. Neither has a chance of passing the Senate without substantial revision.

House Republican leaders informed lawmakers the lower chamber would come back into session on Sunday evening to consider any compromise that might come out of the Senate.

The prospect of an agreement seemed dead Thursday morning after Reid predicted Congress would not likely act by the Dec. 31 deadline, sending the Dow Jones Industrial Average plunging by more than 100 points and the S&P 500 by nearly 20.

“I have to be honest — I don’t know, time-wise, how it can happen now,” Reid said.

If Congress fails to find common ground by year’s end, people will be hit by immediate across-the-board tax hikes and significant cuts to federal discretionary spending.

Speaking on the floor Thursday afternoon, McConnell said a deal is still possible, although he warned Democrats not to attempt to stick his party with an unbalanced offer in hopes deadline pressure would prevail upon Republicans to accept it.

“Hopefully there is still time for an agreement of some kind that saves taxpayers from a wholly, wholly preventable economic crisis,” he said.

McConnell also warned the White House and Democrats should not expect Senate Republicans to simply roll over and "write a blank check" for anything Senate Democrats put forward "just because we find ourselves at the edge of the cliff.”

“That wouldn’t be fair to the American people," McConnell said on the Senate floor.

Reid, speaking on the floor immediately after McConnell, sounded skeptical.

He questioned the likelihood of passing a compromise through the House, noting Boehner pulled from the floor a bill extending tax rates on family income under $1 million last week.



“The speaker’s number-one goal is to get elected speaker on Jan. 3,” he said.

The appearance of progress encouraged Wall Street, at least. The Dow and the S&P 500 recovered most of their losses to finish only a few points down on the day.

Rank-and-file Democrats say they have been kept in the dark about what kind of a bill Reid plans to move.

Last week, Senate Democratic leaders insisted Obama and Boehner should put together a compromise.

“The two key people are the president and the Speaker and until they come to an agreement, not much else is going to happen,” Sen. Charles Schumer (N.Y.), the third-ranking Senate Democratic leader, said last week.

When asked Thursday if the Senate would now take the lead by passing a Reid-McConnell compromise, Schumer said: “We’ll see.”

Reid and McConnell have teamed up over the past two years to strike late-stage compromises when congressional stalemates threatened the nation’s fragile economic recovery.

In the summer of 2011, McConnell masterminded a plan to allow Congress to raise the debt limit without requiring lawmakers to vote repeatedly for augmenting federal borrowing authority. It became a key component of the Budget Control Act. At the end of last year, Reid and McConnell hashed out a short-term extension of the payroll tax holiday, which the House later accepted grudgingly.