By Alexander Bolton - 12/31/12 05:53 PM EST
Senate leaders are racing against the clock to reach a "fiscal cliff" deal the House and Senate can approve on New Year's Eve.
Leaders in the upper chamber narrowed their differences Sunday as Republicans agreed to drop a demand to curb cost-of-living increases to entitlement benefits, while Democrats showed flexibility on taxes.
Hopes for a deal remained in the hands of Senate GOP Leader Mitch McConnell (Ky.) and Vice President Biden, who spent much of the night in negotiations.
“The Leader and the VP continued their discussion late into the evening and will continue to work toward a solution,” a spokesman for McConnell said of the talks. The spokesman added that more details would be provided when they were available.
President Obama is scheduled to speak about the fiscal cliff at 1:30 p.m.
Senate Majority Leader Harry Reid (D-Nev.) updated the Senate when it began business at 11 a.m., telling the chamber talks were continuing but that the sides were running out of time.
“There are a number of issues on which the two sides are still apart,” Reid said. “But negotiations are continuing as I speak. We really are running out of time.”
Reid asked for cooperation from colleagues on both sides of the aisle to waive Senate procedural rules so a deal could receive a vote before midnight.
“Americans are threatened with a tax hike in just a few hours. I hope we can keep in mind our single-most important goal is to protect middle-class families,” Reid said.
Separately, Republican senators scheduled a 2 p.m. meeting where they could discuss the talks.
Signs of trouble emerged on the left, after Sen. Tom Harkin (D-Iowa) criticized an emerging deal as being too generous with tax breaks for the wealthy.
Democrats have moved from their position of demanding that all taxpayers with annual incomes above $250,000 pay higher rates, and have raised their threshold to $450,000. Democrats have also signaled new flexibility on extending the current estate tax rate.
“This is one Democrat that doesn’t agree with that at all,” Harkin said. “What it looks like is it looks like all of the tax things are going to be made permanent but all of the other things that the middle class in America depend on is extended for one year, maybe two years.
“I think that’s grossly unfair. Grossly unfair,” he added.
Other Democrats offered support for Biden, including Sen. Barbara Boxer (D-Calif.), who in floor comments that immediately followed Harkin's pressed her colleagues to be positive about the talks and to agree that all sides would have to make concessions.
Senate Finance Committee Chairman Max Baucus (D-Mont.) said that while there is no deal yet, differences have narrowed.
"Every day overall we're getting closer and that's good news. I do think this will be resolved in the next couple of days. Maybe even today," he said.
Most members remain in the dark on actual details of the negotiations between Biden and McConnell, who have a history of Senate deal-making. Their cooperation is seen as a sign that Democrats and Republicans in the upper chamber could still be closing in on an elusive deal.
Sen. Johnny Isakson (R-Ga.) on Monday called McConnell and Biden the two "best" negotiators for the talks.
"I'm sure that a final deal hasn't been agreed to, but as long as Vice President Biden and Mitch McConnell are talking ... they are the two that last August made the Budget Control Act possible. They got us the postponement to get us to this deadline now, so we've got our best two negotiators at the table," he said.
Reid has proposed raising the threshold for extending current tax rates on individual incomes to $360,000 and on family incomes to $450,000, according to Democratic senators who received a briefing from him. Republicans have countered with a proposal to raise the threshold for individuals to $450,000 and families to $550,000.
But the estate tax and the sequester, an automatic $109 billion cut to domestic and defense spending next year, remain outstanding issues.
Republicans want to extend the estate tax at its current 35 percent rate and exempt inheritances below $5 million.
Both sides want to halt the sequester but cannot agree how to offset its cost.
Democrats say the revenues collected from raising taxes on the wealthy should pay for the sequester, while many Republicans say that is a nonstarter.
“You cannot in my opinion turn the sequester off without paying for it,” said Sen. Bob Corker (R-Tenn.). “You can’t pay for it with revenues; those are cuts.”
But Republicans are not unified.
Sen. John McCain (Ariz.), the ranking Republican on the Armed Services Committee, said the first priority should be to postpone them. He vowed to vote against any deal that does not.
“That’s one of the biggest problems because obviously some of us cannot vote for anything that doesn’t address sequester because of national security,” he said. “The sequester in my view has got to be at least delayed.”
Senate Democratic Whip Dick Durbin (Ill.) said his side is still fighting to extend unemployment benefits.
The leaders started the weekend on an optimistic note and gave themselves 36 hours to craft a deal that could be presented to their respective caucuses on Sunday afternoon.
But the talks hit a ditch on Saturday night, when McConnell made a proposal that included switching the formula used to calculate Social Security benefit payments. Using the chained consumer price index, or "chained CPI," would curb the growth of the program's cost-of-living adjustments.
Democrats slammed it as a poison pill and warned there would be no last-minute deal to avoid tax hikes if Republicans insisted on entitlement reform, which Democrats had assumed was off the table at this late stage.
McConnell quickly dropped his demand for Social Security reform and reached out to Biden in hope that he could help “jump-start” the negotiations.
At one point during a meeting with Senate Republicans, McConnell left the room to discuss the next steps with Biden.
“What’s frustrating about this is that this is more about histrionics and theater than it is about good-faith negotiations,” Sen. John Cornyn (R-Texas) said. “I’m somewhat slightly encouraged that Sen. McConnell is talking to the vice president.”
Cornyn said McConnell and Biden talked about “something specific” and the Republican leader would evaluate the president’s latest position and recommend a course of action to the Senate Republican Conference.
Reid said the Republican concession on Social Security would allow the talks to move forward.
Reid and McConnell made progress on some fronts in the talks before hitting an impasse over Social Security benefits on Sunday afternoon.
Democrats acknowledge they will not be able to include stimulus funding for transportation and infrastructure projects. Republicans say Democrats have dropped their demand to raise the debt ceiling.
And there is mounting evidence that Republicans will give more ground on income tax rates.
Sen. Olympia Snowe (R-Maine), who earlier this year voted against Obama's favored tax plan, said she could support Obama's proposal to extend tax rates only on annual incomes below $250,000 if it were the only way to prevent middle-class tax rates from rising. Democrats also signaled willingness to compromise on the threshold for extending rates.
“I like the Reid proposal,” said Sen. Barbara Mikulski (Md.), a liberal Democrat. She said it would have to include other provisions such as one fixing the Alternative Minimum Tax, which was originally designed to ensure the wealthy pay a minimum percentage in taxes but was not indexed for inflation.
If the Senate approved a deal on Monday evening or Tuesday morning, it would give the House a chance to vote on New Year's Day before the markets open again on Wednesday. But swift approval in the upper chamber would depend on getting unanimous consent to waive procedural rules, by no means a sure prospect.
Published at 5 a.m. and updated at 12:53 p.m.