Senate Majority Leader Harry Reid said negotiators could reach a U.S. budget deal today that would protect all but top earners from a tax increase at midnight.
“They’re progressing,” Reid, a Nevada Democrat, said of the talks in an interview as he entered the Capitol this morning. Asked if he thought a deal could be reached today, Reid said, “I really hope so. We’re not there yet, though.”
There is still no agreement and gaps between the two parties remain. Republicans and Democrats were narrowing the annual income level at which tax rates would increase in 2013 to between $400,000 and $500,000.
Progress picked up after a weekend of private talks and public sniping as lawmakers sought to avert more than $600 billion in tax increases and spending cuts that make up the so- called fiscal cliff. Even if a deal is reached and can get through both chambers of Congress, it would be more limited than President Barack Obama and leaders of both parties sought. It would set up another battle early in 2013 over the budget and the federal debt limit.
Senate Minority Leader Mitch McConnell said he and Vice President Joe Biden spoke at 12:45 a.m. and 6:30 a.m. today. As he arrived at his office, McConnell, a Kentucky Republican, gave reporters no indication of whether there was movement toward a deal.
Income Tax Rates
Talks between Reid and McConnell stalled yesterday because of disputes over income tax rates, the estate tax and other issues. McConnell reached out to Biden in an effort to break the impasse, while staffers worked into the night trading and reviewing offers.
Representative Chris Van Hollen of Maryland, the top Democrat on the House Budget Committee, told Bloomberg Television today that the odds of reaching a deal are “a little better than 50-50” while noting that “a lot has to go right.”
The Senate reconvenes today at 11 a.m. Washington time. Reid said yesterday on the Senate floor that there would “perhaps” be further announcements then. “I certainly hope so,” he said.
The Standard & Poor’s 500 Index fell 0.3 percent to 1,398.34 at 9:32 a.m. in New York. The benchmark 10-year Treasury bond yield increased two basis points, or 0.02 percentage point, to 1.72 percent at 9:35 a.m. in New York, according to Bloomberg Bond Trader prices.
Bush Tax Cuts
Tax cuts first enacted during George W. Bush’s presidency are scheduled to expire tonight. Obama and other Democrats have sought to extend the reductions for married couples’ income up to $250,000 a year while letting tax rates rise for income above that amount. Republicans oppose tax rate increases for any income level.
“The sticking point appears to be a willingness or interest or frankly, the courage to close the deal,” McConnell said on the Senate floor yesterday. “I’m willing to get this done, but I need a dance partner.”
Illinois Senator Dick Durbin, the second-ranking Democrat, said unresolved issues include the income threshold at which tax rates would rise, expiring estate tax levels and how to prevent an expansion of the alternative-minimum tax. Democrats, who represent many of the high-tax states where the AMT has the biggest bite, want to permanently limit its reach.
Capital Gains
There is a direct relationship between the income level at which higher taxes will begin and the estate tax, said a Senate aide familiar with the negotiations.
The higher the threshold for an income tax increase, the more Democrats want Republicans to relent on estate taxes, the aide said. Republicans want to keep estate taxes at current levels, with a $5.12 million per-person exemption and 35 percent top rate; some Democrats agree with this. Obama wants a $3.5 million exemption and 45 percent top rate.
Durbin also said there is a debate over raising the rate for capital gains and dividends from 15 percent to 20 percent. The issue is at what income level the rate would jump to the higher percentage, he said.
According to a person familiar with the talks who asked for anonymity when discussing them, Democrats are pushing for an income level as low as $250,000 as a trigger for a 20 percent tax rate on capital gains and dividends. Taxpayers with income levels below $250,000 would still pay a capital gains and dividend tax rate of 15 percent, the person said.
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