Senate inches toward fiscal deal

Senate Republicans say Senate Republican Leader Mitch McConnellMitch McConnellOvernight Finance: House rejects financial adviser rule; Obama rebukes Sanders on big banks Senators roll out changes to criminal justice bill Sanders is most popular senator, according to constituent poll MORE (Ky.) is willing to drop his demand to curb the growth of Social Security cost-of-living increases.

The demand from McConnell had thrown a wrench into talks Sunday on a “fiscal cliff” deal as Senate Majority Leader Harry ReidHarry ReidSatanists balk at Cruz comparison Cory Booker is Clinton secret weapon Overnight Energy: Dems block energy spending bill for second day MORE (Nev.) and other Democrats quickly balked at the request, which they said they would not accept. 

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But a number of Senate Republicans said it was not a core demand of their conference, suggesting taking it out of a deal would not prevent a last-second agreement from being reached. 

"We need to take CPI off the table," said Sen. John McCainJohn McCainRepublicans who vow to never back Trump Russia’s nuclear strategy: It’s a trap! Clinton face-swaps Trump on Snapchat MORE (R-Ariz.). "That is not part of the negotiations because we can't win an argument that has Social Security for seniors versus taxes for the rich, so we need to take it off the table."

At issue is the formula used to calculate benefit payments. Republicans prefer switching to the chained consumer price index — or "chained CPI" — while Democrats insist on maintaining the current method.

When asked if Republican leaders would be willing to drop Social Security reform from the talks, McCain said: "I think we're in agreement that should be off the table."

Incoming Senate Republican Whip John CornynJohn CornynFirst US Zika death reported in Puerto Rico Senate confirms Obama's long-stalled ambassador to Mexico Overnight Healthcare: Medicare fight looms on Capitol Hill MORE (R-Texas) said Republican leaders never really expected Reid to agree to reduce the growth of the entitlement program in the midst of tax negotiations.

"I don't think anybody ever expected Social Security to be part of this, it's all going to be about taxes," he said.

Cornyn said the biggest obstacle at this point is getting Democrats to return to the talks.

"The discussion was really about the fact that there had been no response to the Republican offer by Sen. Reid and that really we didn't have a negotiating partner," he said, summarizing a closed-door meeting of the Senate GOP conference Sunday afternoon.

Reid said on the Senate floor Sunday evening he will continue working with McConnell and alerted colleagues to expect the next update Monday morning.

“There is still significant distance between the two sides but negotiations continue,” Reid said. “There is still time left to reach an agreement, and we intend to continue negotiations.

“We’ll have further announcements perhaps at 11 in the morning, I certainly hope so,” he said.

McConnell has begun talking with Vice President Biden in an effort to "jump-start" the negotiations.

McConnell left the Republican meeting to speak to Biden by phone and later returned. He told colleagues he needed some time to process what Biden said and come back to them with a recommendation.

Despite the blowup over Social Security, Senate Democrats and Republicans appear to be inching toward an agreement.

Reid has proposed raising the threshold for extending income tax rates to $360,000 for individual income and $450,000 for family income, according to Sens. Dick DurbinDick DurbinElizabeth Warren stumps, raises funds for Duckworth Senators roll out changes to criminal justice bill Let the Democratic veepstakes begin MORE (D-Ill.) and Tom HarkinTom HarkinDo candidates care about our health or just how much it costs? The Hill's 12:30 Report Mark Mellman: Parsing the primary processes MORE (D-Iowa), who with other Democrats received a briefing from Reid. Rob Nabors, the White House director of legislative affairs, attended the meeting but did not speak to the caucus.

Republicans have countered with a proposal to extend rates for individual income below $450,000 on individual income and $550,000 for family income, according to the senators.

Harkin said Republicans also want to set the estate tax rate at 35 percent with an exemption on $5 million inheritances. 

“It’s just not good,” he said.

Durbin said Democrats are still fighting to extend unemployment benefits but acknowledged their demand for transportation stimulus is no longer realistic.

Republicans say Democrats have dropped their demand to include an increase in the federal debt ceiling.

Emerging from the Democratic caucus meeting, Reid said he was glad that Republicans are willing to drop Social Security from the mix but added “we’re still left with a proposal they've given us that protects the wealthy and not the middle class, and I'm not going to agree to that."

Both sides are still trying to turn off $109 billion in sequestered cuts to defense and non-defense spending. Democrats want to use the new tax revenue from allowing Bush era rates to expire to offset turning off the sequester, a Democratic aide said. The GOP wanted chained CPI as the offset.

"If that is unacceptable to them, they need to come up with an alternative," Sen. John ThuneJohn ThuneGOP blasts Obama for slow economic growth Overnight Tech: Business data deals on FCC agenda Overnight Tech: Email privacy bill gets its day MORE (R-S.D.) said.

Democrats and Republicans also disagree over how to pay for stopping the automatic spending cuts.

A senior Democratic aide said the money should come from the revenues collected from raising taxes on the wealthy, but some Republicans say that is unacceptable.

“We all know revenues are going to increase on the wealthy,” said Sen. Bob CorkerBob CorkerThe Trail 2016: The establishment comes around GOP warms to Trump Trump vows to expand map for GOP, win Michigan MORE (R-Tenn.). “To use that money to spend it and not use it to reduce deficits is beyond belief and goes against everything the president has said over the last year but that’s where they are.

“You cannot in my opinion turn the sequester off without paying for it,” he said. “You can’t pay for it with revenues, those are cuts.”

McCain said he would not vote for any deal that does not delay the sequester of defense spending.

Cornyn said that McConnell expects to convene the conference again later Sunday as talks continue.

Without a deal, Reid has said he will bring to the floor on Monday a default bill that extends the Bush-era income tax rates for family income below $250,000, extends unemployment benefits and expiring business tax provisions, and freezes scheduled cuts in Medicare payments to doctors.

A top Senate Republican said the party would likely try to amend Obama's tax proposal if Reid brought it to the floor. Asked if the GOP would demand a 60-vote threshold to pass the president's bill at the last minute, Sen. John Cornyn (Tex.) replied, "We'd like to be able to offer some amendments."

Battles over amendments often delay action on Senate legislation, but a number of Republican senators said Sunday they might vote for Obama's fallback bill if it was the final option to prevent a major portion of the fiscal cliff.

— Russell Berman and Erik Wasson contributed to this report.

— Posted at 4:32 p.m. and last updated at 6:25 p.m.