Democrats seek leverage as fiscal cliff looms

[July 17, 2012]  WASHINGTON (AP) -- Democrats are going all-in in a fiscal game of chicken, saying they'll let everyone's income taxes rise on Jan. 1 and slash defense spending amid 8-plus percent unemployment if Republicans continue to balk at raising taxes just on those making more than $250,000 a year.

The brave face is being adopted as President Barack Obama and Congress come to grips with the possibility that gridlock and stalemate will result in the government careening off a fiscal cliff in January with automatic tax increases, spending cuts and an approaching exhaustion of borrowing ability.

"If we can't get a good deal, a balanced deal that calls on the wealthy to pay their fair share, then I will absolutely continue this debate into 2013 rather than lock in a long-term deal this year that throws middle-class families under the bus," Sen. Patty Murray, D-Wash., said in a speech Monday.

Murray's salvo was the latest in an almost daily back-and-forth between top Republicans and Democrats over the one-two punch facing the economy in January: expiration of the Bush tax cuts and the imposition of $110 billion in automatic spending cuts, half coming from defense.

"They're ready and willing to go right off the fiscal cliff if they don't get their way," said Senate GOP Leader Mitch McConnell of Kentucky. "Because they think it will make it likelier they'll get their way."

McConnell was an architect of the automatic spending cuts, which were designed to prod a deficit-reduction supercommittee to reach an agreement rather than actually take effect. The supercommittee failed and the idea of automatic cuts is now an unpopular one.

The gamesmanship also includes votes in the Republican-controlled House and Democratic-run Senate over the next two weeks on competing one-year extensions of former President George Bush's 2001 and 2003 tax cuts.

The GOP version extends the full range of the Bush tax cuts.

A plan circulated Monday by Senate Democrats would keep income tax rates where they currently are for families earning below $250,000 a year and individuals making less than $200,000, as Obama has proposed. But the tax cuts enacted a decade ago on income above those limits would expire, with the top income tax bracket rising to 39.6 percent.

Democrats are bolstered by opinion polls that show voters favor increasing taxes on the wealthy. But they also risk sharing the blame for a broader tax increase and sudden spending cuts that economists like Congressional Budget Office Director Doug Elmendorf say would probably throw the economy back into recession next year.

It's a risk they seem willing to take so far.

"If middle-class families start seeing more money coming out of their paychecks next year, are Republicans really going to stand up and fight for new tax cuts for the rich?" Murray said. "I think they know this would be an untenable political position."

Defense contractors are already bracing for the cuts and warn that the Pentagon is likely to slow the pace of spending this fall and harm the economy even before the bell tolls in January. Contractors like Lockheed Martin say the law requires them to issue warnings of possible layoffs 60 days before Jan. 1 -- meaning they'd arrive just days before the election.

"I could only hope that this is a temporary aberration and that cooler heads will ultimately prevail when the price of inaction becomes even more apparent," said Sen. John Cornyn, R-Texas.

On taxes, on the other hand, some argue that the impact of the fiscal cliff won't be too dramatic since most of the increases taking effect Jan. 1 can be addressed retroactively.

For all the tough talk now, attitudes are likely to be reshaped by who wins the November election. Democrats see an Obama win as a mandate for sealing his promise four years to raise taxes on people in the top two brackets. Mitt Romney is on record as favoring a temporary fix to avert the fiscal cliff and give his incoming administration time to forge a longer-term solution.

Either way, many people predict that the most likely outcome is for the warring parties to pass temporary legislation to punt the issue into next year to let the new Congress and whoever controls the White House sort it out.

Republicans are confident that Democrats -- just as they did two years ago -- will agree to extend all of the tax cuts during a post-election lame duck session. For starters, both sides are calling for just a short-term extension of the Bush tax cuts anyway in order to buy time for lawmakers to do a complete rewrite of the tax code.

"Doesn't it make sense to say, 'Look the president said in 2010 the economy is in such bad shape we couldn't afford to have a massive tax increase?'" said Sen. Orrin Hatch of Utah, top Republican on the tax-writing Finance Committee.

"Yet all of a sudden in an election year he's (Obama) got a different point of view," said Hatch. "Doesn't it make sense to put this over for a year and dedicate an extra year to tax reform?"

[Associated Press; By ANDREW TAYLOR]

Associated Press writer Laurie Kellman contributed to this report.

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