Clash nearing over spending cuts, tax boosts set to begin next year

WASHINGTON -- A budget showdown for the ages could begin after this year's election and stretch well into 2013 -- despite the threat that an impending half-trillion-dollar avalanche of tax increases and spending cuts might rekindle a national recession.

The reason: an unprecedented collision of high-stakes fiscal decisions, coming at a time of intense partisanship, a teetering economy, record federal deficits and, possibly, a new president.

Campaigning for the White House and Congress will make substantive action all but impossible before the elections. And agreement may be nearly as tough during a post-election, lame-duck session in November and December, barring a European financial meltdown or Middle East oil supply crisis that demands an immediate response by lawmakers.

"I don't know how a Congress that can't agree on anything in two years is all of a sudden going to come together with the administration in the last 45 days of the year to solve the problem," said Rep. Steven LaTourette, R-Ohio.

No one can confidently predict the outcome of the battle over what many are calling the "fiscal cliff." Much depends on whether President Barack Obama defeats Republican challenger Mitt Romney in November and which party controls Congress.

If Romney wins, Republicans will want to delay decisions until he takes office in January. In that case, a lame-duck session would focus on postponing the spending cuts and extending current tax rates for six months to a year. If Obama is re-elected, the fight could easily stretch into 2013 due to the complex issues and the parties' deep differences.

When political and economic stakes reach these levels, the solution almost always comes from party leaders and the White House. Many in Washington expect that to be true this time as well.

Even so, bipartisan groups of senators are seeking middle ground, meeting in a Washington town house, a restaurant and discreet Capitol hideaways. A common starting point has been a debt-reduction plan by a 2010 commission headed by Democrat Erskine Bowles and Republican Alan Simpson.

"If there's any chance to do something either before the election or after the election, somebody has got to have done the homework," said Senate Budget Committee chairman Kent Conrad, D-N.D., a leader of one bipartisan group of senators.

On Tuesday, a pair of respected budget veterans became the latest experts to prod lawmakers to drop their ideological differences and act.

"You've got to put your mindset on it's almost like a war" threatening the U.S. way of life, Pete Domenici, a Republican and former Senate Budget Committee chairman, told the Senate Finance Committee.

Alice Rivlin, a White House budget director under President Bill Clinton, said failure to act would be "cataclysmic." Rivlin and Domenici headed a separate 2010 bipartisan commission that proposed a federal deficit-cutting plan.

On Jan. 1, tax cuts enacted a decade ago under President George W. Bush will expire. They slashed rates on wages, dividends and capital gains. Also ending will be this year's Social Security payroll tax cut, dozens of tax reductions for businesses and the exemption of millions of middle-class families from the alternative minimum tax -- resulting in a one-year tax increase totaling around $400 billion.

Around the same time, $65 billion in spending cuts in defense and domestic programs will begin taking effect, the start of $1.2 trillion in 10-year reductions triggered when last year's congressional supercommittee failed to reach a debt-cutting compromise. Billions in reductions in Medicare reimbursements for doctors will kick in, and emergency benefits for the long-term unemployed will run out.

That's if Congress fails to take action.

Sometime in early 2013, Congress also will need to renew the government's borrowing authority, a chore that nearly triggered a stalemate last summer between Obama and the GOP-run House and a first-ever federal default.

Lawmakers also want to try concocting a long-term debt-reduction plan and overhaul the entire tax code. Both of those tasks rank among the most complex legislators ever face.

As a backdrop, there are annual budget deficits exceeding $1 trillion and a limp economy that created a dismal 69,000 jobs last month as unemployment remained over 8 percent.

"I don't think we've approached anything more difficult," said Sen. Lamar Alexander, R-Tenn., who with Sen. Mark Warner, D-Va., has led informal, bipartisan gatherings of senators looking for a way out of the mess. "None of that's all been done all at once before, and none of it's going to be easy."

Action isn't mandatory by Jan. 1, because the tax cuts could be restored retroactively and the spending cuts would be phased in gradually. But Sen. Orrin Hatch, R-Utah, and others predict that the economy could begin suffering this fall, as defense contractors and other government suppliers prepare for the cuts by laying off workers.

Yet for every lawmaker seeking resolution this year -- "We have no choice," Senate Finance Committee Chairman Max Baucus, D-Mont., told reporters Tuesday -- others relish a partisan battle.

The noisiest dispute -- which will be a repeated theme during this year's political campaigns -- is over the Bush-era tax cuts. Arguing that everyone must sacrifice during hard times, Obama and congressional Democrats want to end the reductions for the richest Americans while renewing them for most people. Republicans insist on extending the reductions for everyone, arguing that the wealthy create jobs.

As a result, a deadlock that causes all the tax cuts to expire Jan. 1 is a possibility. The White House has said Obama won't extend them for the highest earners even temporarily, while Republicans say there aren't enough votes in the GOP-run House to renew the reductions unless everyone is included.

Obama "will make the case very clearly that Republicans are holding the entire economy hostage to their obsession of retaining tax breaks for the wealthiest Americans." says Maryland Rep. Chris Van Hollen, top Democrat on the House Budget Committee.

"If he's so fixated on raising marginal tax rates for his sense of equity, that comes at the expense of the economy," House Budget Committee Chairman Paul Ryan, R-Wis., said of Obama.

Both sides received a May warning from the nonpartisan Congressional Budget Office. It said that if the tax increases and spending cuts occur in January, the economy will shrink at an annual rate of 1.3 percent in the first half of 2013, enough to "probably be judged a recession" before expanding later in the year.