Senate approves 'fiscal cliff' deal, crisis eased

1 of 9. U.S. Senate Majority Leader Harry Reid (D-NV) (center) departs with an aide, after a senate vote in the early morning hours, from the U.S. Capitol in Washington January 1, 2013.

Credit: Reuters/Jonathan Ernst

By David Lawder and Richard Cowan

WASHINGTON | Tue Jan 1, 2013 2:59am EST

WASHINGTON (Reuters) - The Senate moved the U.S. economy back from the edge of a "fiscal cliff" on Tuesday, voting to avoid imminent tax hikes and spending cuts in a bipartisan deal that could still face stiff challenges in the House of Representatives.

In a rare New Year's session at around 2 a.m. EST (0700 GMT), senators voted 89-8 to raise some taxes on the wealthy while making permanent low tax rates on the middle class that have been in place for a decade.

But the measure did little to rein in huge annual budget deficits that have helped push the U.S. debt to $16.4 trillion.

The agreement came too late for Congress to meet its own deadline of New Year's Eve for passing laws to halt $600 billion in tax hikes and spending cuts which strictly speaking came into force on Tuesday.

But with the New Year's Day holiday, there was no real world impact and Congress still had time to draw up legislation, approve it and backdate it to avoid the harsh fiscal measures.

That will need the backing of the House where many of the Republicans who control the chamber complain that President Barack Obama has shown little interest in cutting government spending and is too concerned with raising taxes.

All eyes are now on the House which is to hold a session on Tuesday starting at noon (1700 GMT).

Obama called for the House to act quickly and follow the Senate's lead.

"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 in a statement.

"There's more work to do to reduce our deficits, and I'm willing to do it. But tonight's agreement ensures that, going forward, we will continue to reduce the deficit through a combination of new spending cuts and new revenues from the wealthiest Americans," Obama said.

Members were thankful that financial markets were closed, giving them a second chance to return to try to head off the fiscal cliff.

But if lawmakers cannot pass legislation in the coming days, markets are likely to turn sour. The U.S. economy, still recovering from the 2008/2009 downturn, could stall again if Congress fails to fix the budget mess.

"If we do nothing, the threat of a recession is very real. Passing this agreement does not mean negotiations halt, far from it. We can all agree there is more work to be done," Majority Leader Harry Reid, a Democrat, told the Senate floor.

A new, informal deadline for Congress to legislate is now Wednesday when the current body expires and it is replaced by a new Congress chosen at last November's election.

The Senate bill, worked out after long negotiations on New Year's Eve between Vice President Joe Biden and Senate Republican Minority Leader Mitch McConnell, also postpones for two months a $109 billion "sequester" of sweeping spending cuts on military and domestic programs.

It extends unemployment insurance to 2 million people for a year and makes permanent the alternative minimum tax "patch" that was set to expire, protecting middle-income Americans from being taxed as if they were rich.

'IMPERFECT SOLUTION'

The tax hikes do not sit easy with Republicans but conservative senators held their noses and voted to raise rates for the rich because not to do so would have meant increases for almost all working Americans.

"It took an imperfect solution to prevent our constituents from a very real financial pain, but in my view, it was worth the effort," McConnell said.

House Speaker John Boehner - the top Republican in Congress - said the House would consider the Senate deal. But he left open the possibility of the House amending the Senate bill, which would spark another round of legislating.

"The House will honor its commitment to consider the Senate agreement if it is passed. Decisions about whether the House will seek to accept or promptly amend the measure will not be made until House members ... have been able to review the legislation," Boehner and other House Republican leaders said in a statement.

Boehner has struggled for two years to get control over a group of several dozen Tea Party fiscal conservatives in his caucus who strongly oppose tax increases and demand that he force Obama to make savings in the Medicare and Social Security healthcare and retirement programs.

A campaign-style event held by Obama in the White House as negotiations with Senate leaders were taking place on Monday may have made it more difficult for Republicans to back the deal. In remarks to a group of supporters that resembled a victory lap, the president noted that his rivals were coming around to his way of seeing things.

"Keep in mind that just last month Republicans in Congress said they would never agree to raise tax rates on the wealthiest Americans. Obviously, the agreement that's currently being discussed would raise those rates and raise them permanently," he said to applause before the Senate deal was sealed.

Obama's words and tone annoyed Republican lawmakers who seemed to feel that the Democrat was gloating.

"That's not the way presidents should lead," said Republican Senator John McCain, Obama's rival in the 2008 election.

A deal with the House on Tuesday, while uncertain, would not mark the end of congressional budget fights. The "sequester" spending cuts will come up again in February as will the contentious "debt ceiling," which caps how much debt the federal government can hold.

Republicans may see those two issues as their best chance to try to rein in government spending and clip Obama's wings at the start of his second term.

(Additional reporting by Richard Cowan, Mark Felsenthal, Rachelle Younglai, Kim Dixon and Jeff Mason; Writing by Alistair Bell; Editing by Eric Walsh)

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Analysis: At cliff's edge, old ideas to cap tax breaks are new again

By Kim Dixon and Kevin Drawbaugh

Mon Dec 31, 2012 3:57pm EST

n">(Reuters) - Imposing overall caps on how much high-income people in the United States can claim on their tax returns in deductions, exemptions and other tax breaks is an idea whose time may have come - again.

In the whirl of "fiscal cliff" talks, bipartisan backing has grown for imposing, or in some cases reinstating, caps on tax breaks for top earners.

On Monday, Republicans threw their support behind several approaches to do just that in a framework to step away from the fiscal cliff of $600 billion in new taxes and spending cuts set to take effect on January 1.

Under an emerging deal brokered by Republican Senate Minority Leader Mitch McConnell and Democratic Vice President Joe Biden, curbs on deductions and exemptions for households earning more than $300,000 would be re-imposed, according to a source close to the talks.

For several years, Democratic President Barack Obama has proposed re-imposing the limits. Republicans have opposed such caps for more than a decade, but the idea may be coming full circle.

These limits "were originally done in 1990 at the behest of the Republicans who didn't want tax rates to go up," said Michael Graetz, a Columbia University tax law professor and a former top Treasury Department official.

The main reason for the switch now? The urgent search for politically achievable paths to avoid falling off the fiscal cliff of sharp tax increases and spending cuts.

Talks on avoiding the cliff were moving along on Monday with the fresh offer from McConnell and Biden.

The beauty of the approaches, backers say, is that they let politicians raise government revenue without raising tax rates as much, said economists, Republicans and congressional aides.

Moreover, a strategy that caps several tax breaks broadly could be more expedient than trying to curb tax breaks one at a time that would incur the wrath of lobbyists who would fight them all the way.

Lawmakers are sizing up several ideas.

PEP AND PEASE

Two ideas backed by McConnell are reinstating the personal exemption phase-out (PEP) and so-called Pease limits on itemized deductions. Both were created in 1990 in a budget deal between Republican President George H.W. Bush and Democrats in Congress.

PEP and Pease - often viewed as a package deal - both reduce how much high-income taxpayers can claim in personal exemptions, in the case of PEP, and itemized deductions, in the case of Pease. Both measures work to raise taxes on top earners, without explicitly raising the tax rates that they pay.

When first imposed more than two decades ago, "they were ways to keep the rate at a certain level," Graetz said.

So how do they work?

PEP deals with the personal exemptions that taxpayers claim near the top of the Internal Revenue Service's Form 1040. Taxpayers claim exemptions for themselves, their spouses and their dependents. Last year, each exemption was worth $3,800.

The Pease limit - named after its author, former Ohio Democratic Representative Don Pease - applies to itemized deductions, such as the ones taken for mortgage interest, charitable giving and state and local taxes paid.

By reducing the values of exemptions and deductions, both PEP and Pease would work to raise the taxable income of wealthier people and, as a result, the taxes they pay.

Under a previous proposal offered by Obama, reinstating them would raise about $165 billion in new tax revenue over 10 years, the Tax Policy Center estimated.

Both limits were gradually eliminated under President George W. Bush. By 2010 they were history, a status which was extended for two years by Obama in an agreement with Republicans.

28 PERCENT CAP

Another idea is Obama's proposal to cap the value of tax deductions and certain tax exemptions for high-income taxpayers.

The president's proposal would limit the value of these tax breaks as one moves to a higher tax bracket. For example, a taxpayer in the current 35 percent tax bracket with $100,000 worth of qualified deductions and exemptions gets a $35,000 tax break. Under the 28 percent limit, that taxpayer would only get a $28,000 tax break.

Such a change would raise about $580 billion over a decade, according to a White House estimate, a significant chunk of revenue.

"Republicans have resisted it since the president proposed it," said Alan Viard, an economist at the conservative-leaning American Enterprise Institute think tank.

But a top Republican aide has said that House of Representatives Speaker John Boehner was willing to consider the president's proposed cap in budget talks with Obama.

Viard said that the idea fits with Republican support for broadening the tax base in exchange for lower tax rates.

There are limits already in place for some tax breaks, such as the $1 million limit for home mortgages.

(Editing by Howard Goller and Mohammad Zargham)

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Analysis: Economy would dodge bullet for now under fiscal deal

U.S. Senate Minority Leader Mitch McConnell (C) departs the senate floor with an aide after a senate vote in the early morning hours at the U.S. Capitol in Washington January 1, 2013.

Credit: Reuters/Jonathan Ernst

By Jason Lange

WASHINGTON | Tue Jan 1, 2013 2:52am EST

WASHINGTON (Reuters) - A deal worked out by U.S. Senate leaders to avoid the "fiscal cliff," was far from any "grand bargain" of deficit reduction measures.

But if approved by the U.S. House of Representatives, it could help the country steer clear of recession, although enough austerity would remain in place to likely keep the economy growing at a lackluster pace.

The Senate approved a last-minute deal early Tuesday morning to scale back $600 billion in scheduled tax hikes and government spending cuts that economists widely agree would tip the economy into recession.

The deal would hike taxes permanently for household incomes over $450,000 a year, but keep existing lower rates in force for everyone else.

It would make permanent the alternative minimum tax "patch" that was set to expire, protecting middle-income Americans from being taxed as if they were rich.

Scheduled cuts in defense and non-defense spending were simply postponed for two months.

Economists said that if the emerging package were to become law, it would represent at least a temporary reprieve for the economy. "This keeps us out of recession for now," said Menzie Chinn, an economist at the University of Wisconsin-Madison.

The contours of the deal suggest that roughly one-third of the scheduled fiscal tightening could still take place, said Brett Ryan, an economist at Deutsche Bank in New York.

That is in line with what many financial firms on Wall Street and around the world have been expecting, suggesting forecasts for economic growth of around 1.9 percent for 2013 would likely hold.

At midnight Monday, low tax rates enacted under then-President George W. Bush in 2001 and 2003 expired. If the House agrees with the Senate - and there remained considerable doubt on that score - the new rates would be extended retroactively.

Otherwise, together with other planned tax hikes, the average household would pay an estimated $3,500 more in taxes, according to the Tax Policy Center, a Washington think tank. Budget experts expect the economy would take a hit as families cut back on spending.

Provisions in the Senate bill would avoid scheduled cuts to jobless benefits and to payments to doctors under a federal health insurance program.

AUSTERITY'S BITE

Like the consensus of economists from Wall Street and beyond, Deutsche Bank has been forecasting enough fiscal drag to hold back growth to roughly 1.9 percent in 2013. Ryan said the details of the deal appeared to support that forecast.

That would be much better than the 0.5 percent contraction predicted by the Congressional Budget Office if the entirety of the fiscal cliff took hold, but it would fall short of what is needed to quickly heal the labor market, which is still smarting from the 2007-09 recession.

"We continue to anticipate a significant economic slowdown at the start of the year in response to fiscal drag and a contentious fiscal debate," economists at Nomura said in a research note.

In particular, analysts say financial markets are likely to remain on tenterhooks until Congress raises the nation's $16.4 trillion debt ceiling, which the U.S. Treasury confirmed had been reached on Monday.

While the Bush tax cuts would be made permanent for many Americans under the budget deal, a two-year-long payroll tax holiday enacted to give the economy an extra boost would expire. The Tax Policy Center estimates this could push the average household tax bill up by about $700 next year.

The suspension of spending cuts sets up a smaller fiscal cliff later in the year which still could be enough to send the economy into recession, said Chinn.

He warned that ongoing worries about the possibility of recession could keep businesses from investing, which would hinder economic growth.

"You retain the uncertainty," Chinn said.

(Reporting by Jason Lange; Editing by Eric Walsh)

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Hours from "fiscal cliff," Washington still awaits deal

1 of 15. A man walks past the U.S. Capitol Building in Washington December 17, 2012.

Credit: Reuters/Joshua Roberts

By Fred Barbash

WASHINGTON | Mon Dec 31, 2012 1:27am EST

WASHINGTON (Reuters) - The U.S. Congress comes back on Monday without a deal to avert the "fiscal cliff" and only a few hours of actual legislative time scheduled in which to act if an agreement materializes.

Negotiations involving Vice President Joe Biden and Senate Republican leader Mitch McConnell appeared to offer the last hope for avoiding the across-the-board tax increases and draconian cuts in the federal budget that will be triggered at the start of the New Year because of a deficit-reduction law enacted in August, 2011.

A jolt from the financial markets could also prod the parties, as it has occasionally in the past.

"I believe investors will show their displeasure" at the lack of progress in Washington, said Mohannad Aama, managing director at Beam Capital Management, an investment advisory firm in New York.

Democratic and Republican leaders in the Senate had hoped to clear the way for swift action on Sunday. But with the two sides still at loggerheads in talks, Senate Democratic leader Harry Reid postponed any possible votes and the Senate adjourned until Monday.

The main sticking point between Republicans and Democrats remained whether to extend existing tax rates for everyone, as Republicans want, or just for those earning below $250,000 to $400,000, as Democrats have proposed.

Also at issue were Republican demands for larger cuts in spending than those offered by President Barack Obama.

Hopes for a "grand bargain" of deficit-reduction measures vanished weeks ago as talks stalled.

While Congress has the capacity to move swiftly when motivated, the leaders of the U.S. House of Representatives and the Senate have left themselves little time for what could be a complicated day of procedural maneuvering in the event of an agreement.

House Speaker John Boehner has insisted that the Senate act first, but that chamber does not begin legislative business until about noon Monday.

OTHER BUSINESS ALSO ON AGENDA

And the cliff is not the only business on the House agenda. Farm-state lawmakers are seeking a one-year extension of the expiring U.S. farm law to head off a possible doubling of retail milk prices to $7 or more a gallon in early 2013.

Relief for victims of Superstorm Sandy is waiting in line in the House as well, though it could still consider a Senate bill on assistance for the storm until January 2, the last day of the Congress that was elected in November 2010.

Expiring along with low tax rates at midnight Monday are a raft of other tax measures effecting tens of millions of Americans.

A payroll tax holiday Americans have enjoyed for two years looks like the most certain casualty as neither Republicans or Democrats have shown much interest in continuing it, in part because the tax funds the Social Security retirement program.

The current 4.2 percent payroll tax rate paid by about 160 million workers will revert to the previous 6.2 percent rate after December 31, and will be the most immediate hit to taxpayers.

A "patch" for the Alternative Minimum Tax that would prevent millions of middle-class Americans from being taxed as if they were rich, could go over the cliff as well. Both Republicans and Democrats support doing another patch, but have not approved one.

At best, the Internal Revenue Service has warned that as many as 100 million taxpayers could face refund delays without an AMT fix. At worst, they could face higher taxes unless Congress comes back with a retroactive fix.

After Tuesday, Congress could move for retroactive relief on any or all of the tax and spending issues. But that would require compromises that Republicans and Democrats have been unwilling to make so far.

Obama said on Sunday he plans on pushing legislation as soon as January 4 to reverse the tax hikes for all but the wealthy.

(Editing by Christopher Wilson)

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Obama says failure to reach fiscal deal would hurt markets

President Barack Obama delivers remarks at the White House in Washington November 28, 2012.

Credit: Reuters/Kevin Lamarque

By Jeff Mason

WASHINGTON | Sun Dec 30, 2012 11:49am EST

WASHINGTON (Reuters) - Financial markets would be affected adversely if U.S. lawmakers fail to agree on a "fiscal cliff" deal before Tuesday, President Barack Obama said in an interview broadcast on Sunday, while urging Congress to act quickly to extend tax cuts for middle-class Americans.

Lawmakers are seeking a last-minute deal that would set aside $600 billion in tax increases and across-the-board government spending cuts that are set to start within days. If Congress does not make that happen, the first bill brought up in the new year would be to reduce taxes for middle-income families, Obama told NBC's "Meet the Press."

"Now I think that over the next 48 hours, my hope is that people recognize that, regardless of partisan differences, our top priority has to be to make sure that taxes on middle-class families do not go up. That would hurt our economy badly," Obama said in the interview taped on Saturday.

"We can get that done. Democrats and Republicans both say they don't want taxes to go up on middle-class families. That's something we all agree on. If we can get that done, that takes a big bite out of the 'fiscal cliff.' It avoids the worst outcomes," Obama added.

Low income tax rates first put in place under Republican former President George W. Bush are due to expire at the end of the day on Monday - the last day of 2012.

Obama said that failing to reach a deal would have a negative impact on financial markets.

"If people start seeing that on January 1st this problem still hasn't been solved, that we haven't seen the kind of deficit reduction that we could have had had the Republicans been willing to take the deal that I gave them ... then obviously that's going to have an adverse reaction in the markets," he said.

RARE SENATE SESSION ON SUNDAY

Obama met with congressional leaders at the White House on Friday and declared himself cautiously optimistic about the chances of an agreement, but he noted in the interview that nothing had materialized since then.

"I was modestly optimistic yesterday, but we don't yet see an agreement. And now the pressure's on Congress to produce," he said.

The Senate is scheduled to hold a rare Sunday session beginning at 1 p.m. EST (1800 GMT), but it was not clear whether the chamber would have fiscal-cliff legislation to act upon.

Obama sketched out what he believed to be the most likely scenarios the end the back-and-forth between both sides. Either the congressional leaders would come up with a deal, or Democrats in the Senate would bring a bill to the floor seeking an up-or-down vote to extend tax cuts for middle income earners.

"And if all else fails, if Republicans do in fact decide to block it, so that taxes on middle class families do in fact go up on January 1st, then we'll come back with a new Congress on January 4th and the first bill that will be introduced on the floor will be to cut taxes on middle class families," he said.

Obama chided Republicans for resisting his call for tax rates to go up for the top two percent of U.S. earners despite what he viewed as significant compromises on his part to cut spending and reform expensive social programs for the poor and elderly.

"They say that their biggest priority is making sure that we deal with the deficit in a serious way, but the way they're behaving is that their only priority is making sure that tax breaks for the wealthiest Americans are protected. That seems to be their only overriding, unifying theme," Obama said.

"The offers that I've made to them have been so fair that a lot of Democrats get mad at me. I mean I offered to make some significant changes to our entitlement programs in order to reduce the deficit," he said.

(Reporting by Jeff Mason; Editing by David Brunnstrom)

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Household debt burden hits 29-year low

By Lucia Mutikani

WASHINGTON | Thu Dec 27, 2012 3:59pm EST

WASHINGTON (Reuters) - A measure of the burden of household debt tumbled in the third quarter to its lowest level in 29 years, which should help free up money for consumer spending and support the economy.

The household debt service ratio -- an estimate of the share of debt payments to disposable personal income -- fell to 10.61 percent from 10.72 percent in the second quarter, the Federal Reserve said on Thursday.

It was the lowest level since the fourth quarter of 1983.

"Consumers have more money in their pockets to spend, which should be positive for the economic recovery going forward," said Gennadiy Goldberg, an economist at TD Securities in New York.

Households built up a massive debt load as the housing bubble expanded and efforts to pay down those debts have been a restraint on spending and the economy's recovery.

The debt service ratio, which takes into account outstanding mortgage and consumer debt, peaked in the third quarter of 2007, shortly before the economy tipped into recession.

The Fed has sought to help consumers dig out by keeping interest rates near record lows. It has held overnight rates near zero since December 2008 and has bought around $2.4 trillion in bonds to further lower borrowing costs.

Even though households are now in better shape, analysts caution that consumer spending could stall if Congress fails to prevent higher taxes from taking hold next year.

An even broader measure of financial obligations that includes automobile lease payments and the cost of renting a home also fell in the third quarter, dropping to 15.74 percent of disposable income -- the lowest level since the first quarter of 1984.

That drop reflected an easier burden for homeowners as mortgage debt payments dropped to 8.90 percent of disposable income in the third quarter, the lowest in 11 years.

Both the overall homeowners measure and separate mortgage gauge peaked in the third quarter of 2007.

"You have a lot of people refinancing their mortgages at lower rates," Goldberg said.

In contrast, the relative cost of rent rose to its highest level since the first quarter of 2010.

The weak housing market has led Americans away from home ownership and toward renting, pushing up rents. At the same time, a modest economic recovery has encouraged some people who had moved in with family and friends to seek their own lodgings, further strengthening the rental market.

While a lightening of household debt burden puts the recovery on firmer ground, it also highlights a hesitance to take on new debt, which could be an obstacle to spending.

"We all (would) like to see better growth in credit, banks being more willing to make more loans to consumers, demand for loans rising," said Omair Sharif, an economist at RBS in Stamford, Connecticut.

"That would push the ratio higher, but that's not necessarily a such a bad thing, especially if rates are so low and you are able to service that debt."

(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Dan Grebler)

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Analysis: After "fiscal cliff" dive, more battles, new cliffs

Macy Curtis, 11, and her grandparents Sam and Andrea Perrone, all of Snellville, Georgia, visit the U.S. Capitol in Washington, December 29, 2012. President Barack Obama and U.S. congressional leaders agreed on Friday to make a final effort to prevent the United States from going over the ''fiscal cliff,'' setting off intense bargaining over Americans' tax rates as a New Year's Eve deadline looms.

Credit: Reuters/Mary Calvert

By David Lawder and Fred Barbash

WASHINGTON | Sat Dec 29, 2012 4:26pm EST

WASHINGTON (Reuters) - Whether or not the "fiscal cliff" impasse is broken before the New Year's Eve deadline, there will be no post-cliff peace in Washington.

With the political climate toxic in Congress as the cliff's steep tax hikes and spending cuts approach, other partisan fights loom, all over the issue that has paralyzed the capital for the past two years: federal spending.

The first will come in late February when the Treasury Department runs out of borrowing authority and has to come to Congress to get the debt ceiling raised.

The next is likely in late March, when a temporary bill to fund the government runs out, confronting Congress with a deadline to act or face a government shutdown. The third will possibly be whenever the temporary bill replacing the temporary bill expires.

While Congress is supposed to pass annual spending bills before the start of each fiscal year, it has failed to complete that process since 1996, resorting to stopgap funding ever since.

Influential anti-tax activist Grover Norquist predicted in an interview with Reuters that conservatives would wage repeated battles with President Barack Obama to demand budget savings every time the government needs a temporary funding bill or more borrowing capacity.

The so-called "continuing resolutions" to which a divided Congress has increasingly resorted to keep the government operating, provide a "very powerful tool" to pry out spending cuts, said Norquist, president of Americans for Tax Reform.

Republican Senator Bob Corker of Tennessee said he will not be satisfied until there are substantial cuts to federal retirement and healthcare benefits known as entitlements, producing savings in the $4.5 trillion to $5 trillion range.

"Unfortunately for America," said Corker, "the next line in the sand will be the debt ceiling."

Most observers see the $16.4 trillion debt limit as the true fiscal cliff in the new year because if not increased, it would eventually lead to a default on U.S. Treasury debt, an event that could prove cataclysmic for financial markets.

The Treasury Department said on Wednesday it would start taking extraordinary measures by December 31 to extend its borrowing capacity for about two more months.

'POISONOUS CLIMATE'

It was a deadlock over raising the debt ceiling in August 2011 that prompted a deficit reduction deal that led to a key fiscal cliff component, the $109 billion in automatic spending cuts on military and domestic programs.

If the fiscal cliff's spending cuts or tax increases are left even partly unresolved on December 31, the political combat over them will carry over into the new Congress, possibly simultaneously with the debt ceiling debate.

"We would be pessimistic of a quick fix" if the deadline is missed, Sean West, head U.S. analyst at Eurasia Group, a political risk consultancy, said in a note to clients. "The political climate will be poisoned. The new Congress will need time to settle in."

"We are concluding one of the most unsuccessful Congresses in history," Democratic Representative John Dingell of Michigan declared in a statement on Saturday, "noteworthy not only for its failure to accomplish anything of importance, but also for the poisonous climate of the institution."

Dingell, 86, is the longest serving member of the House, elected first in 1955.

Historically, bitter struggles in Congress like that over the fiscal cliff lead to further resentment and strife in a cycle of cumulative grudges that now spans nearly 30 years.

Many analysts and lobbyists in Washington believe the strife could get even worse because the new Congress convening on January 3 will include fewer members from moderate or swing districts and more from districts tilted heavily to the left or the right.

Republicans in particular are likely to face their most serious re-election challenges in 2014 not from Democrats but from conservative Republicans challenging them in primary elections.

"Ironically," said a post-election analysis published by the law firm Patton Boggs, "the voters have elected a 113th Congress that may be even more partisan than the 112th."

(Reporting by David Lawder and Fred Barbash; Editing by Eric Beech)

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