Deal to Avert ‘Fiscal Cliff’ Proves Elusive

Washington (AP) -

The deal in Congress to avert the “fiscal cliff” was proving elusive Sunday as a deadline to avert tax hikes on virtually every American worker and block sweeping spending cuts set to strike the Defense Department and other federal agencies grew perilously near.

Senate Majority Leader Harry Reid and Senate Republican leader Mitch McConnell remained at odds on such key issues as the income threshold for higher tax rates and how to deal with inheritance taxes, among other issues. McConnell complained that Reid had yet to respond to a Republican offer made Saturday evening and reached out to Vice President Joe Biden, a longtime friend and former senator, in hopes of breaking the impasse.

One sign of progress came as Republicans withdrew a long-discussed proposal to slow future cost-of-living increases for Social Security recipients as part of a compromise to avoid the cliff. Democrats said earlier Sunday that proposal had put a damper on the talks, and Republican senators emerging from a closed-door caucus meeting said it is no longer part of the equation.

“I was really gratified to hear that Republicans have taken their demand for Social Security benefit cuts off the table. The truth is they should never have been on the table to begin with,” Reid said late Sunday afternoon. “There is still significant distance between the two sides, but negotiations continue.”

At stake are sweeping tax hikes and across-the-board spending cuts set to take effect at the turn of the year. Taken together, they’ve been dubbed the fiscal cliff, and economists warn the one-two punch — which leaders in both parties have said they want to avoid — could result in a big jump in employment, turmoil in financial markets and send the still-fragile economy back into recession.

The U.S. faces the fiscal cliff because the tax rate cuts enacted in 2001 and 2003 during President George W. Bush’s administration expire on Dec. 31. The pending across-the-board reductions in government spending, which will slice money out of everything from social programs to the military, were put in place last year as an incentive to both parties to find ways to cut spending. That solution grew out of the two parties’ inability in 2011 to agree to a grand bargain that would have taken a big bite out of the deficit.

Unless Obama and Congress act to stop them, about $536 billion in tax increases, touching nearly all Americans, will begin to take effect in January. That will be coupled with about $110 billion in spending cuts, about 8 percent of the annual budgets for most federal departments.

Sen. Dick Durbin, the No.2 Senate Democrat, said the two sides remained at odds over the income threshold for higher tax rates and tax levels on large estates. Republicans said that Democratic demands for new money to prevent a cut in Medicare payments to doctors and renew jobless benefits for the long-term unemployed should be financed with cuts elsewhere in the budget. Medicare is the government program that provides health care coverage to the elderly.

Republicans also balked at a Democratic proposal to use new tax revenues to shut off the across-the-board spending cuts, known as a sequester in Washington-speak.

Reid said he’s been in frequent contact with President Barack Obama, who in an interview blamed Republicans for putting the shaky U.S. economy at risk.

“We have been talking to the Republicans ever since the election was over,” Obama said in the interview that was taped Saturday and aired Sunday on NBC. ‘‘They have had trouble saying yes to a number of repeated offers.”

“The mood is discouraged,” said Sen. Joe Lieberman, a Connecticut independent who caucuses with Democrats. “The parties are much further apart than I hoped they’d be by now.”

The pessimistic turn came as the House and Senate returned to the Capitol for a rare Sunday session. Reid and McConnell had hoped to have a blueprint to present to their rank and file by mid-afternoon.

“I’m concerned with the lack of urgency here. There’s far too much at stake,” McConnell said. “There is no single issue that remains an impossible sticking point — the sticking point appears to be a willingness, an interest or courage to close the deal.”

Lawmakers have until the new Congress convenes to pass any compromise, and even the calendar matters. Democrats said they had been told House Republicans might reject a deal until after Jan. 1, to avoid a vote to raise taxes before they had technically gone up, and then vote to cut taxes after they had risen.