Obama, lawmakers return to ‘cliff’ with little room left to maneuver

With time running out, President Obama and members of the Senate will return to Washington on Thursday in search of a scaled-back agreement to lessen the economic pain of the “fiscal cliff.” 

Lawmakers are under pressure to pass some kind of legislation that reverses or delays the tax increases and spending cuts slated for January, but they find themselves without a clear path forward after the breakdown in negotiations between Obama and Speaker John Boehner (R-Ohio).

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The president left Hawaii on Wednesday night to return to work on a fiscal deal and is expected to arrive in Washington before noon on Thursday. The Senate is also expected to be back in business Thursday, though flight delays from a winter storm could prevent the upper chamber from reassembling quickly.

The Senate might be the last hope for a fiscal-cliff agreement following the defeat last week of Boehner’s “Plan B,” which would have raised taxes on annual incomes above $1 million. 

Republican leaders in the House have yet to notify members of any plans to reconvene. After a Wednesday conference call, they issued a joint statement calling on the Senate to act first on legislation to avoid the fiscal cliff. 

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"If the Senate will not approve and send [House-passed bills] to the president to be signed into law in their current form, they must be amended and returned to the House. Once this has occurred, the House will then consider whether to accept the bills as amended, or to send them back to the Senate with additional amendments," the leaders said. "The House will take this action on whatever the Senate can pass, but the Senate first must act."

Boehner and his lieutenants directed the Senate to a pair of bills passed by the House earlier this year that would extend the Bush-era tax rates across income levels and stop the cuts to defense from sequestration.

Senate Majority Leader Harry Reid (D-Nev.) and other Senate Democrats have already ruled out those measures, and are instead pushing a bill passed by the Senate that would extend lower tax rates for incomes under $250,000.

"House Republicans pushed middle class families closer to the cliff by wasting an entire week with their incompetent 'Plan B' stunt. It is time for House Republicans to put middle class families first by passing the Senate's bill to protect 98 percent of Americans from a tax hike on January 1,” Reid spokesman Adam Jentleson said in a statement. “The Senate bill could pass tomorrow if House Republicans would simply let it come to the floor.”

"The Senate has already rejected House Republicans' Tea Party bills, and no further legislation can move through the Senate until Republicans drop their knee-jerk obstruction. Right now, the Senate bill is the only bill that can become law, and House Republicans owe it to middle class families to let it pass with Democratic and Republican votes," Jentleson said.

Adding to the pressure, Treasury Secretary Timothy Geithner on Wednesday said that the nation would hit its debt limit on Dec. 31. 

In a letter to lawmakers, Geithner said the Treasury would “begin taking certain extraordinary measures” to create some leeway. But he warned that the “significant uncertainty” over the fiscal-cliff talks made it difficult to “predict the effective duration of these measures.”

Before leaving Washington, Obama had urged lawmakers to find “common ground” and pass legislation that extends most of the Bush-era tax rates, extends unemployment insurance and sets up a framework for more deficit reduction.

"That's an achievable goal that can get done in 10 days," Obama said.

But since Obama’s public statement, work on an agreement has come to a halt. Reid and Obama have not spoken since they attended the Sunday funeral of Sen. Daniel Inouye (D-Hawaii), and there were no immediate plans to hit the ground running with Thursday meetings, according to one source.

Frustration at the impasse was evident on Twitter, where several House Democrats blasted Boehner for not calling the House back into session.

"What is House GOP waiting for? I'm ready to work," tweeted Rep. Gerry Connolly (D-Va.).

Outside Washington, pessimism is growing about the chances for reaching an agreement. Forty-eight percent of people in a Gallup poll released Wednesday doubted that a deal could be completed in time, up from 40 percent in a previous survey.

Both sides are eager to avoid blame for the slew of automatic tax increases that are approaching on Jan. 1. 

Polls have consistently shown that Republicans would suffer the brunt of public ire if the country goes over the fiscal cliff, but Boehner tried to shift the burden back to Democrats last week.

“Unfortunately, the president and Senate Democrats have vowed to reject and veto all of our proposals while failing to offer a responsible solution of their own," Boehner said on Saturday.

Senate Minority Leader Mitch McConnell (R-Ky.) has asked Reid to bring up legislation extending tax rates that could be molded with a variety of amendments, but Obama has consistently said a deal that doesn’t raise taxes on the highest earners is a nonstarter.

Reid argues that the Senate has already passed a bill extending tax rates, but Republicans in the House say that legislation is inadequate because it would allow taxes on inheritances and dividend income to soar.

Failure to reach a deal could unleash havoc on the economy in 2013.

Financial traders have remained cautiously optimistic during much of the fiscal-cliff standoff, but their confidence began to wane on Thursday after Boehner was forced to scrap his own tax plan for lack of support. The Dow Jones Industrial Average fell roughly 100 points on Friday, followed by another day of decline during light Christmas Eve trading. 

Stocks slid into negative territory for the third consecutive day on Wednesday after a brief morning surge.

The uncertainty about fiscal policy is also weighing on the economy and seems to have contributed to disappointing holiday sales.

Retail shopping climbed just 0.7 percent during the holiday season, according to MasterCard Advisors SpendingPulse — the weakest growth since 2008 and well below last year’s growth of 2 percent. 

— This story was first posted at 2:58 p.m. and has been updated.