Congress Sees Rising Urgency on Fiscal Deal

Senior lawmakers said Thursday that they were moving quickly to take advantage of the post-election political atmosphere to try to strike an agreement that would avert a fiscal crisis early next year when trillions of dollars in tax increases and automatic spending cuts begin to go into force.

Democrats Threaten Payroll Tax Cut Consensus
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Senator Bob Corker, Republican of Tennessee, said he had begun circulating a draft plan to overhaul the tax code and entitlements, had met with 25 senators from both parties and "been on the phone nonstop since the election."

Senator Olympia J. Snowe, the Maine Republican who will retire at the end of the year, made it clear that she intended to press for a deal to avert the so-called fiscal cliff and get serious on the deficit, lame duck or not.

"The message and signals we send in the coming days could bear serious consequences for this country," she said. "It could trigger another downgrade. It could trigger a global financial crisis. This is a very consequential moment."

Senator Charles E. Schumer of New York, the No. 3 Senate Democrat, extended an olive branch to Republicans, suggesting Thursday that he could accept a tax plan that leaves the top tax rate at 35 percent, provided that loophole closings would hit the rich, not the middle class. He previously had said that he would accept nothing short of a return to the top tax rate of Bill Clinton's presidency, 39.6 percent. (Read More: Why 'Rise Above'?)

"If you kept them at 35, it's still much harder to do," Mr. Schumer said, "but obviously there is push and pull, and there are going to be compromises."

The nonpartisan Congressional Budget Office underscored the stakes in a report Thursday that framed Washington's dilemma. It said that if automatic spending cuts go into force and all the Bush-era tax cuts expire, the nation would slip into recession next year and unemployment would rise to 9.1 percent, from October's rate of 7.9 percent. But simply canceling those deficit-reduction measures would risk a financial crisis that would make matters worse, the report said. (Read More: Next Up for Markets? The Fiscal Cliff)

The accelerated activity in Washington showed that members of Congress believed the election had amplified the imperative to strike a deal. Still, signs that the two sides are open to some compromise are no guarantee that they can reach an agreement after warring for two years. Many Republicans will continue to resist any proposal that can be read as increasing taxes, and many Democrats will balk at changes in entitlement programs and spending cuts.

Lawmakers also have a wary eye on the electoral landscape. Senator Mitch McConnell of Kentucky, the Republican leader and a crucial player in budget talks, is up for re-election in 2014 and may resist any deal that could foster opposition back home.

But members of Congress clearly see recent events creating an opening in the post-election session of Congress, when some retiring and defeated lawmakers could have a freer hand on voting for legislation, absent political consequences. Republicans were weakened by losing seats in both the House and the Senate, while Democrats are eager to move to issues like immigration, which animated Latino voters and helped deliver victory on Tuesday. "The conditions are there to act," Mr. Corker said. "I think the environment is different now."

Even conservative Republicans are signaling newfound flexibility. Aides said that on a conference call of House Republicans, a number of lawmakers spoke up to say they needed to give their leaders breathing room and avoid brinkmanship. (Read More: Fixing 'Fiscal Cliff' Will Mean 'Higher' Taxes - Gross)

The budget office report suggested that allowing the Bush-era tax cuts to expire for households earning more than $250,000 a year — a position strenuously opposed by Congressional Republicans — would have relatively modest economic impacts, versus many of the other components of the fiscal cliff.

"House Republicans must end their intransigence on tax cuts for the very wealthy and sit down on a bipartisan basis to finish the work of this Congress," said Representative Sander M. Levin of Michigan, the ranking Democrat on the House Ways and Means Committee.

A separate C.B.O. report released Thursday threw cold water on Republican beliefs that a simplified tax code that lowered income and payroll taxes and closed loopholes to make up for lost revenue would substantially close the deficit by boosting economic growth. Such a plan would raise about $100 billion a year by 2020, far less than Democrats say is necessary, the report said.

The forces arrayed against a budget deal remain powerful, and the gap between the parties — at least in their public postures — is wide. Liberals, backed by Senator Harry Reid of Nevada, the majority leader, say Social Security should not be part of any deal. Senator Bernie Sanders, independent of Vermont and a standard-bearer for the left, said Thursday that virtually all deficit reduction should come from tax increases on the rich, closing loopholes that have allowed profitable corporations to avoid paying any corporate income taxes and cutting military spending.

Mr. Corker said many Senate Republicans were willing to agree to a deal that raises more revenue through an overhaul of the tax code, and that additional revenue must be generated by taxation, not just economic growth. In a speech Thursday in his home state of South Carolina, Senator Lindsey Graham said that fellow Republicans should hold the line on tax rates, but that they had to accept that a reformed tax code would raise more revenues. Only then, he said, can they expect Democrats to negotiate changes to entitlement spending.

Speaker John A. Boehner, Republican of Ohio, has said he will agree only to a deal that lowers the top income tax rate from the current 35 percent, not from the top rate that is scheduled to kick in on Jan. 1, 39.6 percent. He said that additional revenue would be generated by economic growth spurred by a simpler tax code, not by higher taxes.

Spinning revenue from tax cuts like that, Mr. Schumer said, is a "Rumpelstiltskin fairy tale."

Conservatives are not giving in.

"We will certainly face many battles in Congress in the coming months that will give us the opportunity to clearly articulate the failures of liberalism and the common sense of conservative alternatives," Senator Jim DeMint, Republican of South Carolina, said Thursday on Facebook . "We must not shrink from the fight on Capitol Hill."

Andrew Siddons contributed reporting.