Lots of talk comes from Washington about a “fiscal cliff” approaching Dec. 31, after which all kinds of serious financial problems could appear, but that talk is subsiding.
The federal government could fall off that fiscal cliff if political leaders cannot agree on measures to tame the national debt and reduce spending. But interviews with upper Midwest members of Congress show they are optimistic something will be done, and the problem will end up as what could be described as a “fiscal pothole.”
With tax increases and drastic spending cuts due to happen Jan. 1 unless there are congressional and presidential agreements, senators and representatives know they must act, Sen. Kent Conrad said.
“There are all these pressures coming to bear on Congress,” said Conrad, a North Dakota Democrat and chairman of the Senate Budget Committee. “Hopefully, they will respond in a positive way. This is our chance to do something our country really needs us to do. The extremes on the right and left will be shouting and will be opposed, but they will oppose anything.”
Conrad, whose position makes him key to any budget and debt deal, and others from the upper Midwest indicate the most likely outcome of a lame duck session that could last the rest of this year is a partial solution, with details to be worked out early in 2013.
What looked dark before the election looks brighter now, Conrad said. “I have been very encouraged by what members have been saying to me.”
Sen. Amy Klobuchar, D-Minn., said Americans can expect continued rhetoric for a while. “But I think there is an underlying sea change that they want to get to work and get the job done.”
The fiscal cliff everyone talks about consists of two major factors: the end of a variety of tax cuts enacted 10 years ago (which, among other things, would raise income taxes for most Americans) and automatic federal budget cuts.
The two fiscal forces are coming together by coincidence. The automatic spending cuts were put in place to force Congress and the president to reach an agreement by Dec. 31. The tax cuts were enacted under President George Bush, with a 10-year lifespan.
The big budget problem is a $16 trillion federal debt, borrowed money used to pay federal bills, that leaders in both parties say needs to be chopped down.
While Democrats and Republicans generally agree spending needs to fall, they don’t agree on how taxes can help the situation. Decisions need to be made yet this year, otherwise $400 billion in tax increases will kick in Jan.1, which economists say could produce a recession.
Newly re-elected Democratic President Barack Obama champions allowing most of the tax breaks approved under Bush to continue in place, but he wants to allow income taxes on people earning more than $250,000 a year to rise.
Rep. Sean Duffy, R-Wis., said he is optimistic a deal can be reached, but such talk from Obama is frustrating.
“I know the president feels like he has a mandate, but members of Congress feel like they have a mandate,” Duffy said. “You don’t raise any taxes now, especially in a down economy.”
However, he said, since returning to Washington after the election, Duffy said that he has seen a change in fellow Republicans’ attitudes. For one thing, he said, more in his party are willing to close so-called loopholes in the income tax, things such as deductions and tax credits that not everyone can receive.
“That was not our position before,” Duffy said. “You see a softening.”
There are estimates that $800 billion could be raised over several years by eliminating those loopholes, but not raising tax rates.
Duffy said he fears Obama only wants to raise taxes to support new federal programs. “We don’t want to tax more to spend more; that’s not where we are at in the country.”
After meeting with Obama in the White House Friday, congressional leaders said they were optimistic about reaching a deal this year, but offered no specifics beyond the fact that they plan to meet again after Thanksgiving.
Sen. John Thune, R-S.D., said that to prevent unemployment from soaring early next year, likely sparking a recession, “it’s going to require presidential leadership.”
Conrad and other senators from both parties have worked together behind the scenes on a compromise. Conrad said the group has proposals ready.
“There are plenty of options to choose from,” he said.
The retiring senator’s plan for what to do yet this year is three-fold:
— Find a “down payment” of around $400 billion over 10 years, a combination of spending cuts and more revenue.
— Develop a framework of a final plan, with details being worked out in coming months. The framework would include sending congressional committees tax and spending targets they would have to meet.
— Add a “fail safe” provision that at a specific deadline, such as in six months, budget cuts would automatically begin if there is no global deal. These cuts would be more specific than ones leading to the current fiscal cliff.
Whatever the solution, Conrad said, Congress and Obama need to take care. “We have to be very sensitive to how the economy is doing at the moment.”
Part of the job of leaders is to show some progress and cooperation, Klobuchar said, “so it creates enough confidence that we at least have done some things.”
Thune said Republicans are ready to compromise, and Democrats and the GOP really are not far apart.
“There is a path forward there for the president if he wants to come to the table,” Thune said. “I think Republicans are willing to meet him there.”
However, he warned, “it cannot be a function of just raising taxes.”
Thune said Obama wants what amounts to a $1.6 trillion tax increase, double what Republicans and Obama discussed earlier in the year.
The president has said both sides will need to compromise.
“I think the president feels his re-election is a mandate to raise taxes,” Thune said.
Higher taxes are not the answer, Thune said, but he had an idea about how to increase revenue: “To me, of course, the best way to get new revenues is to get the economy growing. … So you don’t want to do anything that impairs or hurts economic growth. And I think that is what raising tax rates would do.”
Like everyone, Thune said he is anxiously awaiting developments. “I don’t know how this ends right now.”
Sen. John Hoeven, R-N.D., said he is among senators pushing behind the scenes to avoid a fiscal cliff.
Obama needs to start things moving, Hoeven said. “I think we need a big plan and I think the president needs to present something and everyone needs to work on it in a bipartisan way.”
Like other Republicans, Hoeven said keeping tax rates low and reducing spending is the best way to solve the problem.
“Economic growth is what drives debt reduction,” the former North Dakota governor said.
Closing tax loopholes and reducing tax credits and reductions is the way to get more revenue, he added.
Hoeven suggested extending current budget laws for a year “while you develop a full-blown plan. I do think that is a possibility and I think it could work.”
Klobuchar said that Republicans have talked more about a balanced approach after the election. “Those are all good signs.”
Looking at newly elected senators, Klobuchar said, many “problem solvers” got elected, so finishing details next year may be less difficult than it has been in the partisan atmosphere that has embraced Washington.
Rep. Collin Peterson, D-Minn., was less optimistic than many in Congress.
“I think the most likely outcome is we won’t get anything done,” he said.
And if something does happen, everything will be decided by congressional leaders and Obama, he said. “We are not going to have anything to say about it. It is going to be yes or no; that’s how it works.”
Duffy worried that problems would follow if the president and congressional leaders reached a deal, agreeing to finish the work next year, with little more than a handshake. “That oftentimes doesn’t work.”