House Republicans balk at "fiscal cliff" deal

House Republicans balk at "fiscal cliff" deal
By Rachelle Younglai and Thomas Ferraro | Reuters – 23 mins ago.

WASHINGTON (Reuters) - Last-minute efforts to step back from the "fiscal cliff" ran into trouble on Tuesday as Republicans in the House of Representatives balked at a deal that would prevent Washington from pushing the world's biggest economy into a recession.

House Republicans complained that a bill passed by the Senate in a late-night show of unity to prevent a budget crisis contained tax hikes for the wealthiest Americans but no spending cuts. Some conservatives sought to change the bill to add cuts.

That would set up a high-stakes showdown between the two chambers and risk a stinging rebuke from financial markets that are due to open in Asia in a few hours.

The Senate would refuse to accept any changes to the bill, a Senate aide said, and it appeared increasingly possible that Congress could push the country over the fiscal cliff after all, despite months of effort.

Strictly speaking, the United States went over the cliff in the first minutes of the New Year because Congress failed to produce legislation to halt $600 billion of tax hikes and spending cuts that start kicking in on January 1.

But with financial markets and federal government offices closed for the New Year's Day holiday, lawmakers had a little more time to work out a compromise without real-world consequences.

The Senate bill drew overwhelming support from Republicans and Democrats alike when it passed by a vote of 89 to 8.

But Republicans who control the House expressed wide dismay with the measure, which includes only $12 billion in spending cuts along with $620 billion in tax increases on top earners.

Majority Leader Eric Cantor, the No. 2 Republican in the House, told reporters after huddling with other Republicans that he does not support the Senate's bill.

"The lack of spending cuts in the Senate bill was a universal concern amongst members in today's meeting. Conversations with members will continue throughout the afternoon on the path forward," said Cantor spokesman Rory Cooper.

Republicans returned for a second meeting at 5:15 p.m. EST (2215 GMT).

Republicans could face a backlash if they scuttle the deal. Income tax rates rose back to 1990s levels for all Americans at midnight, and across-the-board spending cuts on defense and domestic programs would begin to kick in on Wednesday.

Economists say the combination of tax cuts and spending cuts could cause the economy to shrink, and public opinion polls show Republicans would shoulder the blame.

MARKET DISCIPLINE?

Lingering uncertainty over U.S. fiscal policy has unnerved investors and depressed business activity for months.

Financial markets have staved off a steep plunge on the assumption that Washington would ultimately avoid pushing the country off the fiscal cliff into a recession.

Several Republicans said the fight could spill over until Wednesday, at which point they could be pressured by financial markets to accept the Senate bill.

"Everyone knows once the markets open tomorrow our courage drops in direct proportion to the market fall," said one Republican lawmaker who spoke on condition of anonymity.

The bill passed by the Democratic-led Senate at around 2 a.m. would raise income taxes on families earning more than $450,000 per year and limit the amount of deductions they can take to lower their tax bill.

Low temporary rates that have been in place for less-affluent taxpayers for the past decade would be made permanent, along with a range of targeted tax breaks put in place to fight the 2009 economic downturn.

However, workers would see up to $2,000 more taken out of their paychecks annually as a temporary payroll tax cut was set to expire.

The non-partisan Congressional Budget Office said the Senate bill would increase budget deficits by nearly $4 trillion over the coming 10 years, compared to the budget savings that would occur if the extreme measures of the cliff were to kick in.

But the bill would actually save $650 billion during that time period when measured against the tax and spending policies that were in effect on Monday, according to the Committee for a Responsible Federal Budget, an independent group that has pushed for more aggressive deficit savings.

(Additional reporting by Richard Cowan; Writing by Andy Sullivan; Editing by Alistair Bell and Eric Beech)
 

What is the so-called Fiscal Cliff?

The federal budget is approaching what has been commonly called a “fiscal cliff” at the end of the year.  It is when a number of tax cuts and temporary assistance measures expire, deep spending cuts are triggered across government services and even deeper cuts are scheduled in Medicare doctor payments, all near the time when the nation will reach its debt limit.  The non-partisan Congressional Budget Office (CBO) and others have forecast that the economic effects of a net $503 billion increase in revenues and decrease in outlays in fiscal year (FY) 2013 could trigger another recession next year.

Federal Reserve Chairman Ben Bernanke and two bipartisan fiscal commissions have warned to take pains not to disrupt economic growth in the short term while pursuing a necessary longer-term deficit reduction package.  Therefore, any successful proposal will need to create jobs in the short term while also addressing the need for deficit reduction in the long term.  President Obama laid out a plan in his American Jobs Act, which was released more than a year ago, but the House of Representatives failed to even schedule a vote on many of the components that would directly create jobs.  For instance, that package provides a payroll tax credit for employers who hire new workers, and includes billions of dollars for school modernization, infrastructure investment, and hiring and retaining teachers and first responders in our communities.  Enacting these types of job-creation proposals would strengthen the economy while we also pursue long-term deficit reduction.

Last week, CBO released a report estimating the budgetary and economic impacts associated with preventing different parts of the scheduled spending cuts and tax increases.   The following analysis from the House Budget Committee Democratic staff describes the looming budgetary changes, briefly summarizes their effects, and describes some of the alternatives proposed by Democrats and Republicans.

Terror Fight Shifts to Africa

Terror Fight Shifts to Africa

U.S. Considers Seeking Congressional Backing for Operations Against Extremists.

By JULIAN E. BARNES and EVAN PEREZ

WASHINGTON—Military counterterrorism officials are seeking more capability to pursue extremist groups in Africa and elsewhere that they believe threaten the U.S., and the Obama administration is considering asking Congress to approve expanded authority to do it.

The move, according to administration and congressional officials, would be aimed at allowing U.S. military operations in Mali, Nigeria, Libya and possibly other countries where militants have loose or nonexistent ties to al Qaeda's Pakistan headquarters. Depending on the request, congressional authorization could cover the use of armed drones and special operations teams across a region larger than Iraq and Afghanistan combined, the officials said.

The idea comes as the U.S. prepares by 2014 to draw down its remaining forces in Afghanistan, which were authorized by Congress in response to the country serving as base for the al Qaeda plotters of the Sept. 11, 2001 attacks. That authorization has since been applied to pursuing al Qaeda-linked groups as far as Somalia and Yemen, but the threat posed by militants has widened to include other areas and other alliances.

The discussion about seeking new authority underscores the growing U.S. alarm over Islamic extremists in North Africa, where an al Qaeda offshoot has seized control of territory following a coup in Mali to provide the group and its offshoots a working base for operations. The U.S. administration has called the Mali situation a "powder keg" that could destabilize surrounding countries and imperil Western interests.

"The conditions today are vastly different than they were previously," Gen. Carter Ham, the head of U.S. Africa command, said in an interview. "There are now non-al Qaeda-associated groups that present significant threats to the United States." He called the debate over new authorization a "worthy discussion."

Some U.S. officials argue that the existing authority is sufficient, especially if the administration works through African forces and regional governments—as it says it would prefer. But others say new authority is needed if officials decide they need to do more to pressure militant groups.

The debate is going on both within the administration and the Pentagon, where officials remain divided over whether more direct action against militant groups in Africa will be needed.
Obama administration officials emphasized that their approach is still being reviewed. "Everyone is committed to taking on violent extremism in Africa, there is a healthy debate in the administration about how best to counter the threat in the region," an official said.

The terrorist offshoot known as al Qaeda in the Islamic Maghreb, or AQIM, is the biggest single concern. Gen. Ham said that AQIM, which originated in Algeria, has a sophisticated recruiting effort in both sub-Saharan Africa and Europe, and ambitions to attack the West. Fighters from AQIM have been linked to the Sept. 11 assault this year on the U.S. Consulate in Benghazi, but the nature of the alleged involvement remains unclear.

"It is clear to me they aspire to conduct events more broadly across the region, and eventually to the United States," Gen. Ham said. "That is the ideology, that is the campaign plan, establish the caliphate and spread the ideology, attack Western interests, attack democratic forms of government,
and we are certainly seeing that." U.S. Ambassador Christopher Stevens and three other Americans were killed in the Sept. 11 assault.

U.S. officials have offered logistical help for West African countries forming plans for an intervention force in Mali. Such U.S. assistance would not likely require a broader authorization for the use of force. "It's not simply a question of U.S. direct action. There's a preference in many of these instances for regional action," another administration official said.

AQIM, originally known as the Salafist Group for Call and Combat, once resisted ties to al Qaeda. New leaders changed the name and embraced al Qaeda, but experts don't believe it takes its directions. There are also other groups in Mali, such as the Movement for Unity and Jihad in West Africa, which experts said have only indirect ties to the al Qaeda leadership in Pakistan.

The 2001 congressional Authorization for Use of Military Force gave the U.S. military far-reaching authority to go after members of groups that attacked the U.S. and those who harbored them.

Initially, that pursuit was centered in Afghanistan. However, the war soon led U.S. military forces and their drones from Afghanistan to the Horn of Africa, prompting American action in Yemen and Somalia.

The Central Intelligence Agency, meanwhile, has carried out a lengthy campaign of armed drone strikes in Pakistan outside of the 2001 congressional measure. Instead, the CIA's efforts are authorized by the president, who under law can order the CIA into action without congressional legislation.

Obama administration officials, concerned about the legal justifications behind counterterrorism operations, have preferred to rely on congressional authority for the use of force against al Qaeda, seeing such authority as more defensible and acceptable to allies.

Robert Chesney, a professor at the University of Texas law school, said some scholars believe it is sufficient for a regional militant group to announce it is joining al Qaeda to be covered under the 2001 congressional Authorization for Use of Military Force. Other experts believe groups must actively take orders from al Qaeda's central leadership to be covered.

"The uncertainties that have long surrounded the organizational boundaries of al Qaeda are growing more significant," said Mr. Chesney. "We don't have agreement regarding the litmus test showing when a given group has become sufficiently linked to al Qaeda so as to come within the scope of the
authorization for the use of military force."

Some experts believe that the current authorization of force against al Qaeda may lose legal force after the war in Afghanistan is declared over in 2014.

In a speech last week, the Pentagon's top lawyer, Jeh Johnson, also said there will come a "tipping point" at which al Qaeda is effectively destroyed, and the authorization may no longer be in force.
While some in the military welcome new legislation to clarify their powers and responsibilities in dealing with extremist groups, others are wary of the unpredictabilities of congressional action. Some Pentagon officials believe any new legislation considered by Congress would likely come with many
restrictions on the military and its ability to capture, detain or release terrorist suspects.

"It is nearly impossible to get a clean request without riders that cloud the base issue," said a military official.

With the U.S. recently ending the Iraq war and trying to exit Afghanistan, the prospect of new authorization for another conflict is a "monumental decision" and shouldn't be done lightly, said Christopher Anders, senior legislative counsel for the American Civil Liberties Union.

"This is the kind of thing that Americans could end up regretting; we could end up in another decadelong war if this crazy idea isn't stopped," Mr. Anders said.

Some congressional aides said the role of the U.S. military in addressing growing threats in Africa is open to debate.

"You can make a plausible case that this threat is still in gestation and therefore we need to act now decisively to deal with it," said a Senate aide. "You can make an equally plausible case that a lot of these groups are much more locally focused and not particularly impressive."

—Adam Entous contributed to this article.

Senate Passes Legislation to Allow Taxes on Affluent to Rise

Jonathan Ernst/Reuters Senator Mitch McConnell,
the Republican leader, departed early Tuesday after the vote.

Senate Passes Legislation to Allow Taxes on Affluent to Rise
Alex Brandon/Associated Press
By JONATHAN WEISMAN
Published: January 1, 2013

WASHINGTON – The Senate, in a pre-dawn vote two hours after the deadline passed to avert automatic tax increases, overwhelmingly approved legislation Tuesday that would allow tax rates to rise only on affluent Americans while temporarily suspending sweeping, across-the-board spending cuts.

The deal, worked out in furious negotiations between Vice President Joseph R. Biden Jr. and the Republican Senate leader, Mitch McConnell, passed 89-8, with just three Democrats and five Republicans voting no. Although it lost the support of some of the Senate’s most conservative members, the broad coalition that pushed the accord across the finish line could portend swift House passage as early as New Year’s Day.

Quick passage before the markets reopen Wednesday would likely negate any economic damage from Tuesday’s breach of the so-called “fiscal cliff” and largely spare the nation’s economy from the one-two punch of large tax increases and across-the-board military and domestic spending cuts in the
New Year.

“This shouldn’t be the model for how to do things around here,” Senator McConnell said just after 1:30 a.m. “But I think we can say we’ve done some good for the country.”

“You surely shouldn’t predict how the House is going to vote,” Mr. Biden said late New Year’s Eve after meeting with leery Senate Democrats to sell the accord. “But I feel very, very good.”

The eight senators who voted no included Marco Rubio, Republican of Florida and a potential presidential candidate in 2016, two of the Senate’s most ardent small-government Republicans, Rand Paul of Kentucky and Mike Lee of Utah, and Senator Charles E. Grassley, who as a former Finance
Committee chairman helped secure passage of the Bush-era tax cuts, then opposed making almost all of them permanent on Tuesday. Two moderate Democrats, Tom Carper of Delaware and Michael Bennet of Colorado, also voted no, as did the liberal Democrat Tom Harkin, who said the White
House had given away too much in the compromise. Senator Richard Shelby, Republican of Alabama, also voted no.

The House Speaker, John A. Boehner, and the Republican House leadership said the House would “honor its commitment to consider the Senate agreement.” But, they added, “decisions about whether the House will seek to accept or promptly amend the measure will not be made until House
members – and the American people – have been able to review the legislation.”

Even with that cautious assessment, Republican House aides said a vote Tuesday is possible.
Under the agreement, tax rates would jump to 39.6 percent from 35 percent for individual incomes over $400,000 and couples over $450,000, while tax deductions and credits would start phasing out on incomes as low as $250,000, a clear victory for President Obama, who ran for re-election
vowing to impose taxes on the wealthy.

Just after the vote, Mr. Obama called for quick House passage of the legislation.

“While neither Democrats nor Republicans got everything they wanted, this agreement is the right thing to do for our country and the House should pass it without delay,” he said.

 Democrats also secured a full year’s extension of unemployment insurance without strings attached and without offsetting spending cuts, a $30 billion cost. But the two-percentage point cut to the payroll tax that the president secured in late 2010 lapsed at midnight and will not be renewed.
In one final piece of the puzzle, negotiators agreed to put off $110 billion in across-the-board cuts to military and domestic programs for two months while broader deficit reduction talks continue. Those cuts begin to go into force on Wednesday, and that deadline, too, might be missed before
Congress approves the legislation.

To secure votes, Senator Harry Reid, the Senate Democratic leader, also told Democrats the legislation would cancel a pending congressional pay raise — putting opponents in the politically difficult position of supporting a raise — - and extend an expiring dairy policy that would have seen the price of milk double in some parts of the country.

The nature of the deal ensured that the running war between the White House and Congressional Republicans on spending and taxes would continue at least until the spring. Treasury Secretary Timothy F. Geithner formally notified Congress that the government reached its statutory borrowing limit on New Year’s Eve. Through some creative accounting tricks, the Treasury Department can put off action for perhaps two months, but Congress must act to keep the government from defaulting just when the “pause” on pending cuts is up. Then in late March, a law financing the government expires.
And the new deal does nothing to address the big issues that Mr. Obama and Mr. Boehner hoped to deal with in their failed “grand bargain” talks two weeks ago: booming entitlement spending and a tax code so complex that few defend it anymore.

Though the tentative deal had a chance of success if put to a vote, it landed with a thud on Capitol Hill. Republicans accused the White House of “moving the goal posts” by demanding still more tax increases to help shut off across-the-board spending cuts beyond the two-month pause.

Democrats were incredulous that the president had ultimately agreed to around $600 billion in new tax revenue over 10 years when even Mr. Boehner had promised $800 billion. But the White House said it had also won concessions on unemployment insurance and the inheritance tax among other
wins.

Still, Democrats openly worried that if Mr. Obama could not drive a harder bargain when he holds most of the cards, he will give up still more Democratic priorities in the coming weeks, when hard deadlines will raise the prospects of a government default first, then a government shutdown. In
both instances, conservative Republicans are more willing to breach the deadlines than in this case, when conservatives cringed at the prospects of huge tax increases.

“I just don’t think Obama’s negotiated very well,” said Senator Tom Harkin, Democrat of Iowa.
With the legislation now headed to the House, Republicans there signaled that enough of them, in combination with Democrats, could most likely pass the legislation, just weeks after Republicans shot down Mr. Boehner’s proposal to raise taxes only on incomes over $1 million.

“I don’t want to say where I am until I read the legislation, but it is certainly better than the alternative,” said Representative Charlie Dent, Republican of Pennsylvania.

With the threat of huge cuts agonizingly close, official Washington was prepared for the worst. The Defense Department prepared to notify all 800,000 of its civilian employees that some of them could be forced into unpaid leave without a deal on military cuts. The Internal Revenue Service
issued guidance to employers to increase withholding from paychecks beginning Tuesday to match new tax rates at every income level.

“No deal is the worse deal,” said Senator Joseph I. Lieberman, independent of Connecticut, rejecting the assertions of liberal colleagues that no deal would be better than what they would see as a bad deal.

Despite grumbling amongh Republicans and Democrats, it was clear that a deal hashed out through intense talks between Mr. Biden and Mr.McConnell had given both sides provisions to cheer and to jeer.

Under the deal, tax rates on dividends and capital gains would also rise, to 20 percent from 15 percent, on income over $400,000 for single people and $450,000 for couples. The deal would reinstate provisions to tax law, ended by the Bush tax cuts of 2001, that phase out personal exemptions and deductions for the affluent. Those phaseouts, under the agreement, would begin at $250,000 for single people and $300,000 for couples.

The estate tax would also rise, but considerably less than Democrats had wanted. The value of estates over $5 million would be taxed at 40 percent, up from 35 percent. Democrats had wanted a 45 percent rate on inheritances over $3.5 million.

Under the deal, the new rates on income, investment and inheritances would be permanent, as would a provision to stop the alternative minimum tax from hitting middle-class families.

Jennifer Steinhauer and Robert Pear contributed reporting.