WASHINGTON: So what now? The United States House of Representatives' rejection of a bill to raise taxes on just 0.18 per cent of Americans — those making more than $1 million a year has raised questions about the Republican-led chamber's ability to approve any plan to avert the looming 'fiscal cliff'.
Unless US President Barack Obama and the US Congress can forge a deal during the Christmas and New Year's holiday season, the largest economy in the world could be thrust back into a recession because of the steep across-the-board government tax increases and spending cuts that are due to kick in January.
The threat of spending cuts and tax increases — about $600 billion worth — was intended to shock the Democratic-led White House and Senate and the Republican-led House into moving past their many differences to approve a plan that would bring tax relief to most Americans and curb runaway federal spending.
For weeks, Obama and House Speaker John Boehner, the top Republican in Congress, have struggled to find a compromise. But after a glimmer of hope that a deal was close early this week, Boehner — apparently under pressure from anti-tax House Republicans aligned with the conservative Tea Party movement — pressed the 'pause' button on negotiations.
He then tried to push a backup plan through the House late on Thursday, only to see his fellow Republicans kill it. Where do Obama and Congress go from here? Here are some possible scenarios.
'Fiscal cliff light'
If you can't do a huge deal, aim for a small one. In a statement from the White House on Friday, Obama urged congressional leaders to promptly find a middle ground on a
partial solution to the fiscal cliff. He called for preventing tax increases for 98 per cent of Americans and extending expiring unemployment benefits. A quick deal, Obama said, would lay the groundwork for future deficit reduction.
Obama was not specific about who should be targeted for tax increases. During his re-election campaign this fall he called for raising taxes on households with net incomes above $250,000 a year. In recent negotiations with Boehner, Obama raised his proposed threshold to $400,000, compared with the $1 million level the House rejected under Boehner's plan.
Absent from Obama's latest offer was his demand for an increase in the US government's debt limit of about $16.4 trillion, a level likely to be reached in roughly two months. If Congress does not raise the nation's debt limit, by mid-February the Treasury Department would likely exhaust its ability to borrow. That would put the nation at risk of defaulting on its debt.
Obama offered no details on how large of a deficit-cutting plan he would seek next year. Also not mentioned were his previous calls for more infrastructure spending or to find ways to curb spending on Social Security retirement benefits.
A potential problem: Many Republicans would be loathe to go along with any tax increases without significant, long-term spending cuts. But House Democrats might be able to join forces with a couple dozen Republicans to pass a limited bill.
Now that the president has pared back his expectations for what can be achieved by Dec. 31, there may be little incentive to work behind closed doors on a major deficit-reduction package by year's end.
But if Boehner were to agree with Obama the two sides are close to a major, long-term deal, they could try to achieve one. A compromise with possibly $1 trillion in new taxes and $1 trillion in new, long-term spending cuts could be a tough sell for both Republicans and Democrats in Congress. Boehner would have to persuade enough Republicans on the idea of tax increases.
Obama, meanwhile, would have to get Democrats in Congress to back cuts to some social safety net programs such as Social Security pensions and Medicare and Medicaid health insurance for the elderly