By Erik Wasson and Russell Berman - 12/30/12 09:49 PM EST
A Senate "fiscal cliff" deal on Sunday appears to be threatened more by differences on spending cuts rather than on whose taxes will go up on Jan. 1.
Senate Democrats and Republicans are hung up on how to deal with $109 billion in sequestered cuts to defense and non-defense spending that forms part of the fiscal cliff of cuts and tax hikes.
“That is gone. The president already said $400,000,” Sen. Kay Bailey Hutchison (R-Texas) told reporters.
While Hutchison and other Republicans want to keep the estate tax as is — with an exemption up to $5.2 million — the GOP is also showing flexibility. “It can’t go to a million,” she said.
But the sequester is proving to be a hard nut to crack. Hutchison said Democrats are demanding that the deal turn off two years of automatic spending cuts, not just those in 2013.
“If you have a two-year moratorium, you are not really getting the heart of the problem, which is spending,” Hutchison said.
Democratic aides said the party wants to use the new tax revenue from allowing Bush-era rates to expire to offset the cost of eliminating the sequester.
Republicans had at one point floated a change to the formula used to calculate Social Security benefits as a replacement, though it met resistance from Democrats. Republicans are open to other real cuts, aides said.
"If that is unacceptable to them, they need to come up with an alternative," said Sen. John Thune (R-S.D.).
A Democratic aide said there are other spending-cut alternatives that are more doable than Social Security reform, and they are being discussed, opening up the possibility that the standoff could still be resolved.
Sen. Jon Kyl (R-Ariz.) suggested that the House and Senate Republicans were not on the same page with regard to sequestration. Speaker John Boehner has told the president that the sequester cannot simply be eliminated with higher revenue but must be replaced with other cuts, sources have said.
Kyl indicated that was a consideration in the Senate GOP meeting, which Boehner did not attend.
"You have to look at it from the House perspective," Kyl said, referring to sequestration. "Do you want a bill to pass the House or not? It would be better if it were done from savings, if you want it to pass the House."
Kyl told reporters that initially the two sides focused on a narrow tax increase avoidance deal but that talks had expanded, partly because of demands from defense firms and their supporters that looming cuts to the Pentagon be addressed.
Defense hawks in both parties have made clear they view the sequester as a grave threat to national security that cannot be ignored. Industry groups such as the Aerospace Industries Association on Saturday demanded that the deal include a sequester replacement. Incoming Senate Minority Whip John Cornyn (R-Texas) said that McConnell expects to convene the conference again later Sunday as talks continue.