Obama steps into high-stakes debt-limit talks

[June 25, 2011]  WASHINGTON (AP) -- Struggling to break a perilous deadlock, President Barack Obama took direct control Friday of national debt-limit negotiations with both Republicans and Democrats. With the White House warning the nation's economic stability is at stake, it's one of the most severe tests yet of Obama's presidency.

The key disagreement is over taxes. Democrats, including Obama, say a major deficit-reduction agreement must include tax increases or the elimination of tax breaks for big companies and wealthy individuals. Republicans are demanding huge cuts in government spending and insisting there be no tax increases.

Absent an agreement that cuts long-term deficits, Republicans say they will not vote to increase the nation's borrowing, which will exceed its $14.3 trillion limit on Aug. 2. The administration has warned that if Congress does not raise the debt ceiling, it could mean the first U.S. financial default in history and send economic shockwaves around the world.

Discussions led by Vice President Joe Biden that were designed to trim about $2 trillion from long-term deficits abruptly stalled this week, leading Obama to step in Friday and summon the top Senate leaders to the White House.

On Monday morning, Obama and Biden plan to meet with Senate Majority Leader Harry Reid, D-Nev., and in the early evening he will sit down with Senate Republican leader Mitch McConnell of Kentucky. McConnell and House Speaker John Boehner have repeatedly said that no deal can include tax hikes.

Amid an economic slowdown, persistently high unemployment and a looming deadline for action, the negotiations will challenge Obama's ability to forge a compromise that gives all sides a reason to claim victory.

Obama restated his position to Boehner in person and to McConnell by phone on Wednesday, officials said. On Thursday, the two Republicans who had been negotiating with Biden -- House Majority Leader Eric Cantor, R-Va., and Sen. Jon Kyl, R-Ariz. -- abandoned those talks.

Ultimately, there was only so much that those discussions would yield, and it was clear that Obama and the top leaders in Congress at some point would have to step in.

Both sides repeated their negotiating positions on Friday.

"The president is willing to make tough choices, but he cannot ask the middle class and seniors to bear all the burden for deficit reduction and to sacrifice while millionaires and billionaires and special interests get off the hook," White House spokesman Jay Carney said.

Democrats and the White House seemed ready to portray Republicans as beholden to the rich and the energy industry. The White House has proposed raising about $600 billion in new tax revenue, including by ending subsidies to oil and gas companies, an idea that failed in the Senate.

The administration also would tax private equity or hedge fund managers at higher income tax rates instead of lower capital gains rates, change the depreciation formula on corporate jets and limit itemized deductions for wealthy taxpayers. It also has called for repealing a tax benefit for an inventory accounting practice used by many manufacturers.

One proposal advanced by Democratic negotiators would reduce the value of deductions for people earning more than $500,000. In addition, the White House is insisting that Bush era tax cuts end after 2012 for families earning more than $250,000.

"What we've seen on the Republican side overall is all take and no give," said Rep. Chris Van Hollen, one of the Democratic negotiators in the Biden talks. "Any serious approach requires compromise."

In a statement following the White House invitation to Monday's talks, McConnell said Obama needs to decide between tax hikes or a bipartisan agreement. "He can't have both," McConnell said.

"Sadly, the Democrats' response has been a mystifying call for more stimulus spending and huge tax hikes on American job creators. That's not serious, and it is my hope that the president will take those off the table on Monday so that we can have a serious discussion about our country's economic future," McConnell said.

Boehner warned the president that including any tax increase would doom a vote on raising the debt ceiling.

But Obama, Boehner and McConnell have been through this before.

The three negotiated a deal in December that extended Bush-era tax breaks for two years. And Obama and Boehner worked out an agreement in April that cut short-term spending and avoided a government shutdown.

The risks this time are higher.

Many economists and government analysts say the government needs to get control of its long-term debt by taming its deficits. The non-partisan Congressional Budget Office this week called the nation's budget outlook "daunting" and said that without major changes in policies, an aging population and rising health care costs would result in a surging federal debt.

An increase in the debt ceiling of $2 trillion to $2.5 trillion would be needed to allow the government to operate until early 2013, getting policymakers past the November 2012 elections. Treasury Secretary Timothy Geithner has said a debt default would be as devastating as the financial crisis that hit in 2008.

Public and private polls show that increasing the debt ceiling is highly unpopular with voters, particularly among Republicans. Many GOP lawmakers fear that a vote to increase the debt ceiling will make them vulnerable to primary election challenges from other Republicans.

On Friday, a pro-Republican advocacy group announced a $20 million, two-month advertising campaign in key battleground states to increase spending cuts and to reduce the national debt without tax increases. In its first ad, the group, Crossroads GPS, criticizes Obama's 2009 stimulus package as ineffective.

Still, Geithner, speaking to business leaders in New Hampshire Friday, said he was confident the impasse would be resolved.

And even Cantor said the private Biden-led talks had "established a blueprint" for agreement on significant cuts in spending.

[Associated Press; By JIM KUHNHENN]

Associated Press writer Andrew Taylor contributed to this report.

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