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: 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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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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Senate leaders work to avoid New Year's "fiscal cliff"

1 of 12. Senate Majority Leader Harry Reid (D-NV) (2nd L) walks with unidentified aides and security to his office at the U.S. Capitol after returning from a meeting with President Barack Obama at the White House in Washington December 28, 2012.

Credit: Reuters/Mary Calvert

By Richard Cowan and Rachelle Younglai

WASHINGTON | Sat Dec 29, 2012 7:22pm EST

WASHINGTON (Reuters) - Congressional negotiators burrowed into their offices on Saturday to see if they could stop the U.S. economy from falling off of a "fiscal cliff" in just three days when the biggest tax increases ever to hit Americans in one shot are scheduled to begin.

Aides to Senate Majority Leader Harry Reid, a Democrat, and Senate Republican leader Mitch McConnell worked through the day on a possible compromise that would set aside $600 billion in tax increases and across-the-board government spending cuts that are set to kick in next week.

A variety of lower taxes are scheduled to expire at the end of Monday, the last day of the year. If allowed to rise, the approximately $500 billion value of the revenue increases would represent a historic hike when taken together.

The combined punch of the tax increases and spending cuts could push the U.S. economy back into recession.

"We're now at the point where, in just a couple days, the law says that every American's tax rates are going up. Every American's paycheck will get a lot smaller. And that would be the wrong thing to do for our economy," President Barack Obama said in his weekly radio and Internet address, which was broadcast on Saturday.

McConnell left the U.S. Capitol after spending seven hours in his office. "We've been trading paper all day and talks continue into the evening," he told reporters on his way out.

A source with knowledge of the talks, speaking on condition of anonymity, said: "We are still very far apart with almost no time left on the clock."

TEMPORARY PATCHES

One congressional aide close to the talks said that most of what was being discussed late on Saturday would provide temporary patches to the "fiscal cliff" dilemma. The negotiations, the aide said, likely could extend into Sunday.

"They continue to go round and round," the aide said of the negotiations, with ideas constantly in flux.

The aide, who asked not to be identified, said negotiators were discussing the possibility of putting off for a few months the $109 billion in automatic spending cuts due to start on Wednesday. Those cuts would be divided equally between military and non-military programs. It is feared that they could cause severe disruptions inside federal agencies if allowed to occur.

Earlier this week, talk of a temporary delay in the spending cuts was met with derision by some congressional aides.

The extension of the low income tax rates first put in place under Republican former President George W. Bush would also be on a temporary basis, probably one year, the aide said.

No deal had been reached on the most difficult question: Democrats' demand that upper-income earners - families making more than $250,000 a year - see their tax rates go up.

Republicans had been opposed to any rate increase, but lately have signaled a willingness to go along with a higher threshold - and a $400,000 figure has been floating around for days.

Under proposals being discussed, top earners could see their income tax rate rise to 39.6 percent, from the current 35 percent, in order to help tame budget deficits.

The aide added that Republicans still had not agreed to Obama's call for extending long-term unemployment benefits, but that they were demanding some spending cuts to be included in a stop-gap deal.

Disagreements over what to do about low estate taxes that are expiring also had not been worked out, the aide said.

Unless Congress acts, the tax is set to jump on Tuesday - the first day of 2013 - to 55 percent with the first $1 million exempted for individuals. Currently, there is a 35 percent tax and a $5 million exemption.

A Senate Republican leadership aide said that it might not be known until sometime on Sunday whether these talks bear fruit. That is when the leaders are expected to brief their rank-and-file members.

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.

One Democratic aide was pessimistic that McConnell would come up with a counteroffer that Reid would find acceptable. Such a counteroffer would have to be calibrated in a way that also could attract votes from conservative House of Representatives Republicans, many of whom have balked at tax rate increases on anyone.

'HARD TO SEE'

A senior House Republican aide on Saturday voiced pessimism about prospects for a deal.

"It's hard to see Reid agreeing to anything that can get the votes of the majority of the (Republican) majority in the House, thereby allowing a bipartisan accomplishment," the aide said. A "majority of the majority" refers to the 241 Republicans who are in the 435-member House.

The Republican aide placed the blame squarely on Democrats, as many Republican members have done publicly, saying that going off the "fiscal cliff" is a "policy upside" for them. "Higher taxes, devastating defense cuts. The polls tell them they can win the PR (publican relations) war in January. From their perspective, why stop the cliff dive?"

Democrats, in turn, have publicly accused House Speaker John Boehner, the top Republican in Congress, of preferring to put off any tough "fiscal cliff" votes until after a January 3 House election in which he is expected to win another two-year term as speaker.

If McConnell and Reid can manage to reach a deal on inheritance taxes and raising income tax rates on the wealthiest Americans, they likely would throw into the compromise some other "fiscal cliff" solutions.

Those could include extending an array of other expiring tax breaks such as one that encourages companies to conduct research and development. Also, Congress wants to prevent a steep pay-cut in January for doctors who treat elderly patients under the Medicare health insurance program.

Lawmakers also want to prevent middle-class taxpayers from inadvertently creeping into a higher tax bracket, known as the alternative minimum tax, intended for the wealthiest.

If the Reid-McConnell effort fails, Obama has asked the Senate to hold a vote on Monday on a "basic package" that would stop taxes from going up on the middle class and would extend long-term unemployment benefits that are about to expire. If it passes the Senate, its fate would be in the hands of the Republican-controlled House.

(Additional reporting by Thomas Ferraro and Jeff Mason; Editing by Will Dunham)

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Senate leaders to make last-ditch "fiscal cliff" effort

1 of 12. U.S. Senate Minority Leader Mitch McConnell (R-KY) speaks to reporters on his way to lunch at the U.S. Capitol in Washington December 28, 2012.

Credit: Reuters/Mary F. Calvert

By Roberta Rampton and Richard Cowan

WASHINGTON | Fri Dec 28, 2012 8:35pm EST

WASHINGTON (Reuters) - 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.

With only days left to avoid steep tax hikes and spending cuts that could cause a recession, two Senate veterans will try to forge a deal that has eluded the White House and Congress for months.

Obama said he was "modestly optimistic" an agreement could be found. But neither side appeared to give much ground at a White House meeting of congressional leaders on Friday.

What they did agree on was to task Harry Reid, the Democratic Senate majority leader, and Mitch McConnell, who heads the chamber's Republican minority, with reaching a budget agreement by Sunday at the latest.

"The hour for immediate action is here. It is now. We're now at the point where in just four days, every American's tax rates are scheduled to go up by law. Every American's paycheck will get considerably smaller. And that would be the wrong thing to do," Obama told reporters.

A total of $600 billion in tax hikes and automatic cuts to government spending will start kicking in on Tuesday - New Year's Day - if politicians cannot reach a deal. Economists fear the measures will push the U.S. economy into a recession.

Pessimism about the fiscal cliff helped push U.S. stocks down on Friday for a fifth straight day. The Dow Jones industrial average dropped 158.20 points, or 1.21 percent. Retailers are blaming worries about the "fiscal cliff" for lackluster Christmas season shopping.

Under the plan hashed out on Friday, any agreement between McConnell and Reid would be backed by the Senate and then approved in the Republican-controlled House of Representatives before the end of the year.

But the House could well be the graveyard of any accord.

A core of fiscal conservatives there strongly opposes Obama's efforts to raise taxes for the wealthiest as part of a plan to close America's budget deficit. House Republicans also want to see Obama commit to major spending cuts.

Talks between Obama and Republican House Speaker John Boehner collapsed last week when several dozen Republicans defied their leader and rejected a plan to raise rates for those earning $1 million and above.

A Democratic aide said Boehner stuck mainly to "talking points" in Friday's White House meeting, with the message that the House had acted on the budget and it was now time for the Senate to move.

TALKS ON 'BIG NUMBERS'

The two Senate leaders and their aides will plunge into talks on Saturday that will focus mainly on the threshold for raising income taxes on households with upper-level earnings, a Democratic aide said. Analysts say both sides could agree on raising taxes for households earning more than $400,000 or $500,000 a year.

The pair will also discuss whether the estate tax should be kept at current low levels or allowed to rise, the aide said.

Democrat Reid warned of tough talks.

"It's not easy, we're dealing with big numbers, and some of that stuff we do is somewhat complicated," he said.

McConnell described Friday's White House summit, also attended by Democratic House Minority Leader Nancy Pelosi, as "a good meeting."

"So we'll be working hard to try to see if we can get there in the next 24 hours. So I'm hopeful and optimistic," he said.

If things cannot be worked out between the Senate leaders, Obama said he wanted both chambers in Congress to vote on a backup plan that would increase taxes only for households with more than $250,000 of annual income.

The plan would also extend unemployment insurance for about 2 million Americans and set up a framework for a larger deficit reduction deal next year.

There are signs in the options market that investor fear is taking hold. The CBOE Volatility Index, or the VIX, the market's favored anxiety indicator, has remained at relatively low levels throughout this process, but it moved on Friday above 22, the highest level since June.

But some in the market were resigned to Washington going beyond the New Year's Day deadline, as long as a serious agreement on deficit reduction comes out of the talks in early January.

"Regardless of whether the government resolves the issues now, any deal can easily be retroactive. We're not as concerned with January 1 as the market seems to be," said Richard Weiss, a senior money manager at American Century Investments.

Another component of the "fiscal cliff" - $109 billion in automatic spending cuts to military and domestic programs - is set to kick in on Wednesday.

S&P rating agency said on Friday the fiscal cliff impasse did not affect the U.S. sovereign rating.

That lifted the immediate threat of a downgrade from the agency, which cut the United States' triple-A rating in August, 2011 in an unprecedented move after a similar partisan budget fight.

(Additional reporting by David Lawder, Thomas Ferraro, Rachelle Younglai and Mark Felsenthal; Writing by Alistair Bell; Editing by Peter Cooney)

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Obama not making new "fiscal cliff" offer to Congress: source

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

Credit: Reuters/Kevin Lamarque

By Mark Felsenthal

WASHINGTON | Fri Dec 28, 2012 4:06pm EST

WASHINGTON (Reuters) - President Barack Obama was not planning to make a new offer to avert the tax increases and spending cuts that loom on January 1 at a White House meeting with congressional leaders on Friday, a source familiar with the meeting said.

At the meeting, Obama was set to ask lawmakers to hold a vote on a "fiscal cliff" plan that would allow taxes to rise on those who earn $250,000 and up, and that would extend unemployment insurance benefits, according to the source.

Obama believes his plan would pass with a majority in both the House of Representatives and the Senate, the source said.

The president was meeting with Senate Majority Leader Harry Reid, Senate Minority Leader Mitch McConnell, House Speaker John Boehner and House Minority Leader Nancy Pelosi - the first time the group has met together since November.

If congressional leaders object to his plan, Obama will ask them for a viable counterproposal, the source added. If lawmakers have no alternative approach, he will seek an up-or-down vote in Congress on his plan, the source said.

(Reporting by Mark Felsenthal and Roberta Rampton; editing by Todd Eastham)

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Consumer sentiment weakens as fiscal crisis looms

1 of 3. Job seekers stand in line to meet with prospective employers at a career fair in New York City in this file photo taken October 24, 2012.

Credit: Reuters/Mike Segar/Files

By Jason Lange

WASHINGTON | Thu Dec 27, 2012 2:14pm EST

WASHINGTON (Reuters) - U.S. consumer confidence fell more than expected in December, hitting a four-month low as a looming fiscal crisis sapped what had been a growing sense of optimism about the economy.

The report heightened concerns that a failure by Washington to avert planned tax hikes and spending cuts could lead households to close their wallets, threatening an economic recovery that has been steady albeit lackluster.

Other data on Thursday highlighted the positive momentum building in the economy, with the number of Americans filing new claims for jobless benefits falling to a nearly 4-1/2 year low and new home sales hitting their highest level since April 2010.

But gauges of business sentiment have weakened recently on worries Washington will go forward with plans to slash the federal deficit by about $600 billion in 2013.

Now consumers also appear apprehensive, a sign worries about the so-called "fiscal cliff" could bite into household spending.

The Conference Board, an industry group, said its index of consumer attitudes fell to 65.1 from 71.5 in November.

A sub-index measuring how consumers feel about their present situation rose to its highest level in more than four years, but a gauge of sentiment about the future plunged to its lowest point in more than a year.

"Consumers are increasingly preoccupied with the potential damage the fiscal cliff will cause to the economy and to their wallets if a deal is not reached soon," economists at RBS in Stamford, Connecticut, wrote in a research note.

Separately, the Labor Department said initial claims for state unemployment benefits dropped 12,000 last week to a seasonally adjusted 350,000, the Labor Department said.

"This recent improvement in the claims data is potentially a favorable signal for the labor market," said Daniel Silver, an economist at JPMorgan in New York.

After spiking in the wake of a mammoth storm that ravaged the East Coast in late October, new claims have dropped to their lowest levels since the early days of the 2007-09 recession. The four-week moving average fell 11,250 last week to 356,750, the lowest since March 2008.

The claims data has no direct relation to the government's monthly employment report, but it suggests the surge in layoffs since the recession has at least run its course.

Still, many economists think hiring may remain sluggish even as the pace of layoffs ease.

Companies in recent months have been adding to their payrolls at a lackluster pace, and analysts expect the employment report due on January 4 will show 143,000 jobs were created in December, down from 146,000 in November.

"A significant improvement in labor market conditions ahead of any resolution to the fiscal cliff is unlikely," said Michael Gapen, an economist at Barclays in New York.

U.S. stocks opened flat but turned lower as the Senate Democratic leader derided Republicans for the lack of progress in budget talks and warned that a fall off the "cliff" appeared inevitable. Investors sought safety by buying U.S. Treasury debt and the dollar, which rose against the euro.

Following a truncated holiday break in Hawaii, U.S. President Barack Obama returned to Washington to restart talks to avoid the brunt of the fiscal cliff's impact, which would likely put the U.S. economy back into recession if not lessened.

HOLIDAY CAVEAT

The signs of progress in the claims data also included a caveat, at least for the latest week.

Obama declared Monday a holiday for federal workers and many state offices followed suit and were unable to provide complete data for last week's jobless claims. Data for 19 states was estimated, although 14 of those states submitted their own estimates, which tend to be fairly accurate.

The holiday season can make it more difficult to adjust the claims data for normal seasonal fluctuations, another reason to be cautious about the report for last week.

Separately, the Commerce Department said new U.S. single-family home sales rose in November to a 377,000-unit annual rate, while the median sales price jumped 14.9 percent from the same month in 2011, the latest signs the U.S. housing recovery is gaining some steam.

In a fourth report, the Chicago Federal Reserve Bank said its index of factory activity in the U.S. Midwest increased in November to 93.7 from a revised 92.2 in October.

(Reporting by Jason Lange; Additional reporting by Richard Leong and Ryan Vlastelica in New York; Editing by Neil Stempleman)

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Future of state estate taxes hangs on U.S. "fiscal cliff"

By Nanette Byrnes

Wed Dec 26, 2012 2:51pm EST

n">(Reuters) - Falling off the "fiscal cliff" is a bad thing, right?

Not necessarily for some state governments that could begin collecting more in estate taxes on wealth left to heirs if the United States goes over the "cliff," allowing sharp tax increases and federal spending cuts to take effect in January.

In an example of federal and state tax law interaction that gets little notice on Capitol Hill, 30 states next year could collect $3 billion more in estate taxes if Congress and President Barack Obama do not act soon, estimated the Urban-Brookings Tax Policy Center, a Washington think tank.

The reason? The federal estate tax would return with a vengeance and so would a federal credit system that shares a portion of it with the 30 states. They had been getting their cut of this tax revenue stream until the early 2000s. That was when the credit system for payment of state estate tax went away due to tax cuts enacted under former President George W. Bush.

With the return of the credit system next year as part of the "cliff," states such as Florida, Colorado and Texas - which have not collected estate tax since 2004 - could resume doing so. California Governor Jerry Brown has already begun to add the anticipated estate tax revenue into his plans, including $45 million of it in his 2012-2013 revised budget.

Brown may or may not be jumping the gun.

CLOUDY CLIFF AHEAD

The outlook on the "fiscal cliff" coming up at year-end is uncertain. Democratic President Barack Obama has said he hopes for a last-minute deal to avert it. That would need to get done soon, with Congress just now coming back from its holiday break.

Chances of an agreement became more remote last week after Republicans in the U.S. House of Representatives fumbled their own legislative attempt to prevent the fiscal jolt that economists say could trigger a recession.

House Speaker John Boehner abruptly adjourned the chamber for the holidays after failing to gather the votes from within his own party to pass legislation he and other Republicans had drafted, after walking out of negotiations with Obama.

Weeks of inconclusive political drama over the "cliff" have focused largely on individual income tax rates and spending on federal programs such Medicare and Social Security, but many tax issues are also involved, including the estate tax.

At the moment, under laws signed a decade ago by Bush, the estate tax is applied to inherited assets at a rate of 35 percent after a $5 million exemption. That means a deceased person can pass on an inheritance of up to $5 million before any tax applies. Inherited wealth passed to a spouse or a federally recognized charity is generally not taxed.

Obama wants to raise the rate to 45 percent after a $3.5 million exemption. Republicans have called for complete repeal of the estate tax, which they call the "death tax," though Boehner earlier this month called for freezing the estate tax at its present level. It was difficult to determine what the Republicans want after last week's events in the House.

STATES STAND TO GAIN

If Congress and Obama do not act by December 31, numerous Bush-era tax laws will expire, including the one on estate taxes. That would mean the estate tax rate will shoot up next year to the pre-Bush levels of 55 percent after a $1 million exemption.

It would also mean that for the first time in years, a portion of that estate tax would go to the states, through the return of the credit system.

Under that old law, estates paying the tax could get a credit against their federal tax bill for state estate tax payments of up to 16 percent of the estate's value.

If the fiscal cliff were allowed to take hold unaltered by Washington, 30 states would again automatically begin getting their share of federal estate taxes. The state laws are generally written so the state estate tax amounts are calculated under a formula based on the amount of the federal credit.

This would help states that have struggled with lower tax revenues since the 2007-2009 financial crisis and resulting recession, according to research by the Pew Center on the States, though painful federal spending cut backs would also hurt the states.

(Editing by Kevin Drawbaugh and Cynthia Osterman)

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"Fiscal cliff" drag on economy less than feared so far

Women carry shopping bags through Times Square in New York, July 27, 2012.

Credit: Reuters/Andrew Burton

By Jason Lange

WASHINGTON | Fri Dec 21, 2012 12:47pm EST

WASHINGTON (Reuters) - The U.S. economy showed surprising signs of resilience in November despite the approach of the so-called fiscal cliff as consumer spending rose by the most in three years and a gauge of business investment jumped.

Consumer spending rose 0.6 percent when adjusted for inflation, while new factory orders for capital goods outside the defense and aerospace sectors - a proxy for business spending plans - jumped 2.7 percent, the Commerce Department said on Friday.

Economists had pinned earlier weakness in investment plans on worries lawmakers and the White House might fail to strike a deal to avoid the brunt of tax hikes and government spending cuts scheduled to begin in January.

They also worried consumers would hold back as the end-of-the-year deadline approached with both parties far apart on how to avoid the potential hit to the economy. But Friday's data suggested both consumers and businesses had mostly shrugged off the cliff, at least in November.

"It appears that the looming fiscal cliff hasn't been nearly as disruptive as we had feared," said Paul Ashworth, an economist at Capital Economics in Toronto.

Still, another report provided ample reason for caution as U.S. consumer sentiment slumped in December, with households apparently rattled by on-going negotiations to lessen the fiscal tightening that could easily trigger a recession next year.

The Thomson Reuters/University of Michigan's final index of consumer sentiment in December tumbled more than expected to 72.9 from 82.7 a month before.

U.S. stocks fell sharply after a Republican proposal for averting the fiscal cliff was abandoned late on Thursday, eroding optimism that a deal could be reached quickly. At the same time, U.S. government debt prices rallied and the dollar gained ground as investors sought a safe haven.

Economists still expect economic growth to cool in the fourth quarter as companies slow the pace at which they have been re-stocking their shelves, but the data on Friday suggested consumers are offsetting some of that drag.

Consumer spending is on track to grow at a 2.2 percent annual rate in the fourth quarter, faster than during the prior three months, said Michael Feroli, an economist at JPMorgan in New York.

Forecasting firm Macroeconomic Advisers raised its forecast for fourth-quarter economic growth by four tenths of a point to a 1.4 percent annual rate. In the third quarter, the economy expanded at a 3.1 percent rate.

"The economy is holding in here at the end of the year despite the concerns about the fiscal cliff," said Gary Thayer, an economic strategist at Wells Fargo Advisors in St. Louis.

WORRIES AHEAD

Those concerns are not going away.

In November, many analysts on Wall Street said they expected Washington would largely avert the fiscal cliff, and optimism had grown over the last week that a deal was within reach. Since Wednesday, however, negotiations have fallen into disarray.

If Congress and the White House do not reach a deal in time, taxes will go up for all Americans beginning in January and the government will cut spending on a host of programs. Running off the fiscal cliff would slash the nation's trillion-dollar budget deficit nearly in half in just one year.

The impact would only come gradually, but economists expect it would be enough to knock the country into recession in the first half of the year.

So far, uncertainty over the talks appears to have had only a limited impact on the economy.

New orders for durable goods, items meant to last three years or more, rose a greater-than-expected 0.7 percent in November due to gains in machinery, fabricated metal products, and computer and electronic products. Those increases were offset by a decline in volatile aircraft orders.

The report also showed a rise in shipments, brightening the prospects for fourth-quarter economic growth.

Shipments of non-defense capital goods orders excluding aircraft, used to calculate equipment and software spending in the government's measures of gross domestic product, gained 1.8 percent, after rising by a softer 0.6 percent in October.

(Additional reporting by Ellen Freilich and Leah Schnurr in New York; Editing by Andrea Ricci and Tim Ahmann)

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World's investors stirred, not shaken by U.S. fiscal crisis

The U.S. Capitol Building stands in Washington December 17, 2012.

Credit: Reuters/Joshua Roberts

By Mike Peacock

LONDON | Fri Dec 21, 2012 7:28am EST

LONDON (Reuters) - Global investors are betting Washington will overcome its budget deadlock despite an apparently serious setback.

If they are wrong, there could be a sharp market reaction and the U.S. dollar and Treasury bonds would be among the main beneficiaries, making for a very different dynamic to the euro zone crisis, where bond market pressure was instrumental in forcing policymakers to act.

Republican lawmakers rejected a proposal on Thursday by their leader, House of Representatives Speaker John Boehner, designed to extract concessions from President Barack Obama.

It threw into disarray attempts to head off $600 billion worth of tax hikes and spending cuts that could push the U.S. economy into recession.

The dollar climbed versus the euro, stocks slid from Tokyo to London and safe haven government bonds rose but in only muted fashion, indicating a continued belief that a deal will be done.

Is this sensible or complacent?

Jeffrey Rosenberg, chief investment strategist for fixed income at BlackRock, said the only approach was to "hope for the best, but plan for the worst".

"Given the much greater downside from a fiscal cliff failure than upside from success, we continue to maintain our tactical defensive positioning," Rosenberg said.

If differences between Republicans and Democrats cannot be bridged, the dollar -- counter intuitively to the layman's eye -- would attract safe haven flows as the world's reserve currency. The yen could do even better despite the new Japanese government's intent on more forceful monetary and fiscal easing.

"The dollar goes up when people get more nervous because the reflex in the market is to assume it's a safe haven, there's very little consideration given to the nature of the crisis," said Daragh Maher, FX strategist at HSBC.

"If the U.S. is heading towards recession it's not good for anyone, therefore if I have to hold something I may as well hold the dollar. That's how the sequence of logic goes."

Obama and Boehner aim to reach a deal before the New Year, when taxes will automatically rise for nearly all Americans and the government will have to scale back spending on domestic and military programs. The politicians are now in recess until at least December 27.

"The time left to seal a deal is limited," said Kit Juckes at Societe Generale in London.

There is, however, good reason not to panic since the term "fiscal cliff" is somewhat misleading. America will not crash off it on January 1. The tightening process will be more gradual.

The head of G10 FX Strategy at one bank in London said it was much more of a slope than a cliff. "The market's working assumption has been all along that it's going to go right down to the wire, and then they're going to cut a deal."

Hong Hao, Bank of Communications International Securities' chief equity strategist in Hong Kong, said: "If I were a fund manager, I would be looking to lock in gains and going off for the holidays. The U.S. will eventually come to a deal, maybe just not by their self-imposed deadline."

NO BOND PRESSURE

As with the euro debt crisis, the markets could offer a natural check and balance -- if their reaction turns savage, it might pressure a divided Washington to come together.

The difference is that, as with the dollar, U.S. government bonds are viewed as a harbor from risk, so the bond market pressure brought to bear on the euro zone is unlikely to be replicated in this case.

"Although trading at all-time lows, treasury yields could benefit both from renewed equity volatility and the short-term economics after any resolution," said Edward Smith, global strategist at Collins Stewart Wealth Management.

Unlike the euro zone periphery, shunning U.S. assets is not really an option, not least because global markets tend to correlate closely with Wall Street anyway.

For Juckes, the latest standoff in Washington could go two ways: The weakening of Boehner's position could strengthen Obama's hand, particularly since he has already given ground. Alternatively, the Republicans may now be so divided that they cannot back any sort of deal that raises taxes on the wealthier.

The optimists would buy equities and the euro on any dip, he said. "(They) will look at the improving tone to U.S. data and at the vast amount of money that needs investing."

If the glass-half-full view prevails and the world economy starts looking up, Reuters asset allocation polls show major investors are looking to areas that underperformed this year -- notably the Chinese stock market, one of the few major bourses in the red for 2012.

After two years in which the stock markets of the emerging giants underperformed, Russia and Brazil also have backers.

For now, most investors seem to be hoping for the best rather than altering their strategies.

"If it turns out that there's a poor agreement delaying a number of issues until the spring but skating away from the immediate catastrophe of January, or no agreement at all, that clearly is not priced into market expectations," said Andrew Milligan, head of global strategy at Standard Life Investments, which has 163.4 billion pounds of assets under management.

"I think (a lack of agreement) would encourage people even more to go into the dividend yield type stocks ... And clearly the stocks that are more associated with global trade would be the ones that investors would be pulling back from," he said.

(Reporting by Sinead Cruise, Sujata Rao, Nia Williams, Tricia Wright, Richard Hubbard and Clement Tan. Editing by Jeremy Gaunt.)

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Consumer sentiment slumps in December as fiscal woes weigh

A shopper walks down an aisle in a newly opened Walmart Neighborhood Market in Chicago in this September 21, 2011 file photo.

Credit: Reuters/Jim Young/Files

NEW YORK | Fri Dec 21, 2012 10:21am EST

NEW YORK (Reuters) - Consumer sentiment slumped in December as Americans were rattled by on-going negotiations to avert the tax hikes and spending cuts set to come into effect in the new year, data showed on Friday.

The Thomson Reuters/University of Michigan's final reading on the overall index on consumer sentiment tumbled to 72.9 from 82.7 in November, worse than forecasts for 74.7.

It was the lowest level since July and also came in under December's preliminary figure of 74.5.

Talks to avoid the so-called fiscal cliff were thrown into disarray on Thursday evening when Republican lawmakers failed to back an effort by House of Representatives Speaker John Boehner that was designed to extract concessions from President Barack Obama.

Economists say the economy could fall back into recession next year if the changes are allowed to go into full effect.

Record numbers of consumers spontaneously mentioned their concerns that no resolution would be reached before year-end, the survey said.

"Even if something is passed in the next week, unless it includes an extension of the payroll tax holiday, as well as no increase in income taxes except for the wealthy, consumers are likely to be disappointed," survey director Richard Curtin said in a statement.

Of those surveyed, 27 percent said they were concerned about higher taxes, topping the prior high of 26 percent seen in August 2011 in the wake of the drawn-out debt ceiling debate.

U.S. stocks as measured by the SP500 index were down about 1.0 percent in morning trading as hopes faded that a fiscal deal would be reached soon.

Consumers were also less upbeat about the economic outlook, with 35 percent expecting unemployment to rise during 2013, up from 19 percent in October. Only one-third expected an uninterrupted economic expansion over the next five years.

The barometer of current economic conditions slipped to 87.0 from November's 90.7, while the gauge of consumer expectations fell to 63.8 from 77.6.

The survey's one-year inflation expectation edged up to 3.2 percent from 3.1 percent, while the survey's five-to-10-year inflation outlook rose to 2.9 percent from 2.8 percent.

(Reporting by Leah Schnurr)

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Boehner abandons fiscal cliff plan as Republicans balk

1 of 4. House Speaker John Boehner makes a brief statement to the media at the Capitol in Washington December 19, 2012.

Credit: Reuters/Gary Cameron

By Rachelle Younglai and Thomas Ferraro

WASHINGTON | Thu Dec 20, 2012 10:28pm EST

WASHINGTON (Reuters) - Republican lawmakers delivered a stinging rebuke to their leader, House of Representatives Speaker John Boehner, on Thursday when they failed to back an effort designed to extract concessions from President Barack Obama in year-end "fiscal cliff" talks.

The dramatic twist threw into disarray attempts to head off $600 billion worth of indiscriminate tax hikes and spending cuts that could push the U.S. economy into recession next year.

It also cast doubt over Boehner's future as speaker after failing to control unruly conservatives in his caucus.

With only 11 days left for bickering politicians to prevent automatic tax hikes and spending cuts, U.S. stock futures fell sharply on the news of the rebuke to Boehner.

The Ohio congressman had hoped to demonstrate Republican unity by passing a bill through the House, known as "Plan B," that would limit income-tax increases to the wealthiest sliver of the population - those earning $1 million and more, a far smaller slice of taxpayers than Obama wants to pay higher taxes.

But Boehner canceled the vote after failing to round up enough support from his party because many conservative Republicans are opposed to tax hikes on even the richest wage-earning Americans.

"The House did not take up the tax measure today because it did not have sufficient support from our members to pass," Boehner said in a statement after huddling with other Republican leaders.

The White House pledged to work with Congress to reach a deal as quickly as possible.

"We are hopeful that we will be able to find a bipartisan solution quickly that protects the middle class and our economy," White House spokesman Jay Carney said in a statement.

The bill, had it passed, would have put Republicans on record as supporting a tax increase on those who earn more than $1 million per year, breaking with decades of orthodoxy. It won the blessing of influential anti-tax activist Grover Norquist, but other conservative groups fiercely opposed it and many rank-and-file members said they would not support it.

Obama wants to raise taxes on families earning more than $400,000, a much lower threshold.

RECESSION THREAT

Obama and Boehner aim to reach a deal before the New Year, when taxes will automatically rise for nearly all Americans and the government will have to scale back spending on domestic and military programs. Economists say the combined $600 billion hit to the economy could push the U.S. economy into recession.

Boehner said Obama now must first pass a bill through the Democratic-controlled Senate before he holds another vote in the House.

Democrats said Boehner should first hammer out a deal with Obama. "The only way to avoid the cliff altogether is for Speaker Boehner to return to negotiations," said Adam Jentleson, a spokesman for Senate Democratic Leader Harry Reid.

With Republicans in chaos, Boehner will almost certainly need support from House Democrats to pass a deal before the end of the year. But he will have to keep an eye on his right flank before he stands for re-election as the top House lawmaker on January 3.

Alternatively, Boehner could wait until the new year to hold a vote. At that point, tax cuts passed in 2001 and 2003 will have expired for all Americans, and it presumably would be easier to pass a bill that would restore tax cuts for most.

Opinion polls show that more Americans would blame Republicans rather than Obama if they don't reach a deal before then.

So far, negotiations appear to be following the dysfunctional pattern set by the 2011 battle over the debt ceiling: fitful progress alternating with public posturing. Boehner also struggled during that showdown to corral the most conservative members of his own party.

Washington narrowly avoided defaulting on the U.S. government's debt in August 2011, but the down-to-the-wire nature of the effort prompted a first-ever debt rating downgrade and spooked investors and consumers.

This time around, concern over the fiscal cliff has weighed on markets but analysts say that investors appear to be assuming that the two sides will avert disaster.

"The markets are likely to interpret this as signaling even tougher negotiations in coming days," Mohamed El-Erian, chief executive of bond giant PIMCO, told Reuters.

S&P 500 stock futures fell 1.6 percent while Dow Jones stock futures and Nasdaq futures both lost 1.5 percent. At one point S&P 500 e-mini futures were down as much as 3.6 percent.

Lawmakers had hoped to wrap up work before the year-end Christmas break, but leaders in both the House and the Senate have indicated that they may call members back to work next week.

"The brinkmanship will continue," said a senior Republican aide. "This isn't the end of the story. More drama to come."

(Additional reporting by Thomas Ferraro, Mark Felsenthal, Richard Cowan, Jennifer Ablan, Dominic Lau and Kim Dixon; Writing by Andy Sullivan; Editing by Philip Barbara)

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Analysis: Boehner has few options in fiscal cliff mess

U.S. House Speaker John Boehner (R-OH) speaks to the media on a ''fiscal cliff'' on Capitol Hill in Washington, December 20, 2012.

Credit: Reuters/Yuri Gripas

By Richard Cowan

WASHINGTON | Fri Dec 21, 2012 3:34am EST

WASHINGTON (Reuters) - Now that House Speaker John Boehner's "Plan B" for addressing the "fiscal cliff" has crashed and burned, the top U.S. Republican appears to have two remaining options - wash his hands of the entire matter or negotiate a compromise with Democrats that could abandon scores of his fellow Republicans.

The Republican rank and file and Democrats may face an equally stark choice: work together for a change, or plunge together off the cliff.

Boehner tried to ram a "fallback" plan through the House on Thursday - a relatively tiny tax increase on millionaires and billionaires - and failed. His rambunctious Republicans, who see opposition to all tax hikes as a matter of bedrock principle and of political survival, refused to go along.

President Barack Obama and his Democrats who control the Senate take the opposite view - tax hikes on the wealthy are a condition for their support of a fiscal cliff bill. If there is to be a resolution it will largely depend on an improbable scenario - Democrats in the House teaming up with less militant Republicans to back away from the fiscal cliff.

Compromise has been out of style in recent years, and many think it could require some prodding from the markets.

"At this point, I only see one route to avoiding the cliff, a replay of the TARP debacle in 2008," said George Washington University's Sarah Binder, an expert on Congress. In September 2008, the House defeated the bank bailout bill and the market collapsed, prompting a terrified lawmakers to reconsider and pass it.

"In this case, a harsh market and public reaction would be needed to force the hand of the speaker to negotiate a deal that can pass with Democratic votes," she said.

"If the GOP takes a beating in the headlines and the market tanks, I suspect a good number of rank-and-file GOP will demand that the speaker go back to the table. But absent whiplash from the markets and voters, I suspect it's over the cliff we go."

For the time being - or at least the 11 days until the automatic tax hikes and spending cuts are triggered - the House is in disarray and no deal to avert the fiscal cliff is in sight.

While the House in recess for a Christmas break that is likely to last at least until December 27, Boehner must decide whether to move any further in Obama's direction and agree to tax increases much higher than his own proposal that so angered his fellow Republicans on Thursday.

The Ohio Republican also might have to settle for fewer long-term spending cuts than he had hoped for.

WALK ON BY

Boehner's only other apparent option - one that he hinted at late on Thursday following the collapse of his bill - would be to walk away and leave the problem on Democrats' doorstep.

"Now it is up to the president to work with Senator Reid on legislation to avert the fiscal cliff," Boehner said in a statement referring to Senate Majority Leader Harry Reid.

But in a closed-door session before that statement, Republican lawmakers said Boehner told them that he would at least try to work out something with Obama.

Either way, Boehner faces the possibility of having to battle not only Democrats for the next two years, but also his own membership on major bills.

"We have people (Republican lawmakers) who felt like they had to stand on the principle ... they couldn't vote for anything (that raised any taxes). I don't quite understand it," lamented Representative Buck McKeon, the powerful chairman of the House Armed Services Committee, who oversaw passage of a $633 billion defense spending bill for 2013.

"If you don't have the votes, you can't move forward," McKeon said of the Plan B fiscal cliff bill.

Representative Steven LaTourette, a moderate Republican who is retiring at year's end, told reporters that Thursday's legislative defeat - and public relations failure - will not stop Boehner from being re-elected House Speaker on January 3. "Name one member who opposes him," LaTourette challenged reporters.

Firing Boehner, LaTourette said, would be "like saying the superintendent of the insane asylum should be discharged because he couldn't control the crazy people."

Nonetheless, two years into his stint as Speaker, Boehner still has not found the right formula for corralling his Republican majority, especially the Tea Party conservatives whose victories in 2010 helped Republicans wrest control of the House. However, he has taken steps in recent weeks to punish a handful of uncooperative Republicans.

Since unveiling his plan on Tuesday, several conservative groups, including the Heritage Foundation, waged a spirited effort to kill the measure.

Those groups, LaTourette said, had been "making their phone calls, and they're bombing people" with pressure to vote against the bill. That, he added, "makes people nervous" about primary election challengers being recruited in 2014 by outside groups to defeat Republican lawmakers who vote for any tax increase.

"I doubt his speakership is in trouble," said American Enterprise Institute scholar Norm Ornstein, "The big question is whether, and when, he is willing to bring up a bill that will require more Democrats than Republicans to pass."

(Reporting By Richard Cowan. Editing by Fred Barbash)

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Obama would veto Republican "Plan B" on fiscal cliff: White House

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

Credit: Reuters/Kevin Lamarque

WASHINGTON | Wed Dec 19, 2012 10:39am EST

WASHINGTON (Reuters) - President Barack Obama would veto the House Republican "Plan B" tax proposal designed to avert January 1 tax hikes, the White House said on Wednesday, saying the plan does not do enough to balance spending cuts and tax increases.

The veto threat comes less than two weeks before a series of tax hikes and automatic budget cuts that could push the U.S. economy toward a so-called fiscal cliff and trigger another recession.

Republicans in the U.S. House of Representatives could vote on Thursday on a "Plan B" tax bill that House Speaker John Boehner said would extend low tax rates, except on income of $1 million and above.

The White House has said Obama would accept a deal that puts the threshold for income tax hikes at $400,000, a higher threshold than his initial offer.

"The President urges the Republican leadership to work with us to resolve remaining differences and find a reasonable solution to this situation today," White House Communications Director Dan Pfeiffer said in a statement.

(Reporting By Matt Spetalnick, Mark Felsenthal and Roberta Rampton; Editing by Alistair Bell and David Brunnstrom)

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"Fiscal cliff" talks turn sour, Obama threatens veto

1 of 2. U.S. President Barack Obama speaks about the fiscal cliff to members of the media in the White House Briefing Room December 19, 2012.

Credit: Reuters/Kevin Lamarque

By Matt Spetalnick and Mark Felsenthal

WASHINGTON | Thu Dec 20, 2012 1:23am EST

WASHINGTON (Reuters) - Talks to avoid a U.S. fiscal crisis stalled on Wednesday as President Barack Obama accused opponents of holding a personal grudge against him while the top Republican negotiator called the president "irrational."

As a year-end deadline nears, Obama and House of Representatives Speaker John Boehner are locked in intense bargaining over a possible deal to avoid the so-called fiscal cliff of harsh tax hikes and automatic spending cuts that could badly damage an already weak economy.

Obama said he was puzzled over what was holding up the talks and told Boehner's Republicans to stop worrying about scoring "a point against the president" or forcing him into concessions "just for the heck of it."

"It is very hard for them to say yes to me," he told a news conference in the White House. "At some point, you know, they've got to take me out of it."

The rise in tensions threatens to unravel significant progress made over the last week.

Boehner and Obama have each offered substantial concessions that have made a deal look within reach. Obama has agreed to cuts in benefits for seniors, while Boehner has conceded to Obama's demand that taxes rise for the richest Americans.

However, the climate of goodwill has evaporated since Republicans announced plans on Tuesday to put an alternative tax plan to a vote in the House this week that would largely disregard the progress made so far in negotiations.

On Wednesday, Obama threatened to veto the Republican measure, known as "Plan B," if Congress approved it.

Boehner's office slammed Obama for opposing their plan, which would raise taxes on households making more than $1 million a year and is a concession from longstanding Republican opposition to increasing any tax rates.

"The White House's opposition to a backup plan ... is growing more bizarre and irrational by the day," Boehner said through his spokesman, Brendan Buck.

Boehner expressed confidence the House would pass the legislation on Thursday. He urged Obama to "get serious" about a balanced deficit reduction plan.

Wall Street is on edge over the fiscal cliff talks although investors still expect a deal. The S&P 500 stock index slipped 0.76 percent on Wednesday.

Business leaders have descended on Washington to lobby for a deal to avoid going over the cliff while putting public finances on a more sustainable path. Without an agreement to narrow deficits over the long run, the United States could eventually lose investors' trust, triggering a debt crisis.

An acrimonious presidential campaign that culminated in Obama's re-election on November 6 has added to the bad blood in Washington between Obama and congressional Republicans.

The two sides also clashed bitterly last year over the government's limit on borrowing - known as the debt ceiling - an episode that nearly led the nation to default on its debt.

On Wednesday, Obama said the fiscal cliff must not get bogged down with negotiations over the debt ceiling, an issue that must be dealt with again early next year.

But Boehner's offer to raise the debt ceiling enough for another year of borrowing is facing opposition from a large group of Republicans, a House Republican aide said.

LITMUS TEST

Any fiscal cliff agreement by Obama and the Republican leadership would need the support of their parties' rank and file in Congress, and Thursday's vote on Plan B will be a test of Boehner's ability to deliver votes on any eventual deal.

Boehner faces opposition from Republican Tea Party conservatives over his concession to raise tax rates. But in a sign some conservatives are coming around to Boehner's position, anti-tax activist Grover Norquist gave his blessing to the bill.

Other conservative groups, including the influential Club for Growth, are urging Republicans to vote against Plan B.

Obama and Boehner appear to have bridged their biggest ideological differences but remain hung up on the mix of tax hikes and spending cuts meant to narrow the budget gap.

"What separates us is probably a few hundred billion dollars," Obama said.

The White House wants taxes to rise on household incomes above $400,000 a year, a concession from Obama's opening proposal for a $250,000 income threshold.

If a deal is not reached soon, some $600 billion in tax hikes and spending cuts are set to begin next month.

Senior administration officials described negotiations as at a standstill and Obama warned he would ask everyone involved in the talks, "what it is that's holding it up?"

Still, the top Republican in the Senate said a resolution to the stalemate could come by the end of the week.

"There's still enough time for us to finish all of our work before this weekend, if we're all willing to stay late and work hard," said Senate Republican leader Mitch McConnell.

Many Democrats dislike the president's offer to reduce benefits to seniors, although some political allies of Obama have given signs they feel they could swallow this concession.

"I don't like these particular changes," said Democratic Representative Chris Van Hollen, a member of the House leadership from Maryland. But he added: "What people are seeing is the president willing to compromise in order to get things done."

(Additional reporting by Roberta Rampton, Thomas Ferraro and Vicki Allen; Kim Dixon and Richard Cowan; Writing by Jason Lange; Editing by Alistair Bell and Eric Beech)

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Fitch warns U.S. could lose AAA status if fiscal cliff hits

A view of New York's lower Manhattan from the Staten Island Ferry March 10, 2008.

Credit: Reuters/Brendan McDermid

By Marc Jones

LONDON | Wed Dec 19, 2012 5:23am EST

LONDON (Reuters) - Ratings firm Fitch warned on Wednesday there was an increased likelihood it would strip the U.S. of its triple-A status if Washington does not prevent $600 billion of spending cuts and tax hikes from kicking in early next year.

"Failure to avoid the fiscal cliff.. would exacerbate rather than diminish the uncertainty over fiscal policy, and tip the US into an avoidable and unnecessary recession," Fitch said in its 2013 global outlook published on Wednesday.

"That could erode medium-term growth potential and financial stability. In such a scenario, there would be an increased likelihood that the U.S. would lose its AAA status."

Fitch current has a negative outlook on its U.S. sovereign rating. Rival rating agency Standard & Poor's was the first to strip the U.S. of its triple-A status in August last year.

(for link click here)

(Reporting by Marc Jones; Editing by John Stonestreet)

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House Republicans to vote on "fiscal cliff" bill Thursday: Cantor

House Majority Leader Rep. Eric Cantor (R-VA) speaks at a news conference after a Republican caucus meeting on Capitol Hill in Washington on December 18, 2012. U.S. House of Representatives Speaker John Boehner emerged from a meeting with fellow Republicans on Tuesday morning pledging to press forward on talks to avert the ''fiscal cliff,'' as hope of a deal rose.

Credit: Reuters/Joshua Roberts

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Obama rejects Boehner backup plan on "fiscal cliff"

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

Credit: Reuters/Kevin Lamarque

WASHINGTON | Tue Dec 18, 2012 1:01pm EST

WASHINGTON (Reuters) - The White House on Tuesday rejected House of Representatives Speaker John Boehner's "fiscal cliff" backup proposal, saying it fails to meet President Barack Obama's call for a balanced approach and does not put enough of a tax burden on the wealthiest Americans.

The White House weighed in after an aide to Boehner, the top Republican in Congress, said the speaker would begin work on "Plan B" legislation, which would simply extend lower tax rates for incomes below $1 million a year, while negotiations proceed with the White House on a broader tax and spending deal.

"He (Obama) is not willing to accept a deal that doesn't ask enough of the very wealthiest in taxes and instead shifts the burden to the middle class and seniors," Obama spokesman Jay Carney said in a statement. "The president is hopeful that both sides can work out remaining differences and reach a solution so we don't miss the opportunity in front of us today."

(Reporting By Matt Spetalnick and Mark Felsenthal)

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