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Budget crisis scenarios: No deal, big deal, slow deal, rich deal

Published: Wednesday, Dec. 5, 2012 9:44 a.m. CDT

(MCT) — WASHINGTON — Trying to predict the outcome of the “fiscal cliff” negotiations is like trying to predict the final standings for your favorite teams when the season’s only half over.

There are at least four general scenarios for avoiding tax increases and automatic spending cuts at the start of next month: No deal, a big deal, an agreement to make changes in stages over the next few months and a Democratic-led effort to maintain temporary tax cuts for everyone but the top earners.

The most likely outcome is the multistage agreement, phasing in different pieces over several months, an idea that President Barack Obama praised Tuesday. Second on the maybe list is no deal.

A big accord and the Democratic plan are long shots at best. The history of big deals in recent times is varied. Over the last 30 years, the two sides have crafted historic agreements on Social Security, budget limits and overhauling the tax code.

In the summer of 2011, Obama and Republicans engaged in tortured, lengthy negotiations over reducing the budget deficit, winding up agreeing to $900 billion in cuts from anticipated spending over 10 years. But they couldn’t agree on how to go further, triggering a series of $109 billion in automatic reductions that will go into effect Jan. 2 unless a new agreement is reached.

The prospects for several possible outcomes:

MULTISTAGE DEAL

All sides mention this one, and it seems to be attainable. Republicans in the House of Representatives talked this week about agreeing to a framework, perhaps enough spending and tax cuts to avoid the January cliff, coupled with promises — written into law — to make structural changes to the tax code and Medicare sometime next year.

Congressional Democrats have criticized the plan for a lack of specifics, but Obama seemingly endorsed the idea Tuesday, saying it was unlikely that he and Congress would be able to overhaul taxes and entitlement programs in the few weeks that remain.

Instead, he suggested as a model former President Ronald Reagan’s tax overhaul in 1986, which he said took 18 months to develop. He suggested letting tax rates on the top earners increase, then tackling a tax overhaul and changes to entitlement programs sometime next year. “That’s the framework that we’re operating on,” he said in an interview with Bloomberg Television.

NO DEAL

Taxes would rise across the board as income tax rates revert to pre-George W. Bush-era levels.

A lot of lawmakers think that no deal is a real possibility. “We’re standing on the edge,” said Sen. Lindsey Graham, R-S.C.

And Democrats, their thinking goes, won the presidency with Obama campaigning on a pledge to raise income taxes only for the top earners, so why give in? They’d try their chances after Jan. 1, with more Democratic members joining a new Congress.

The nonpartisan Congressional Budget Office says that scenario might trim half a percentage point off economic growth in the first half of next year. The unemployment rate, which was 7.9 percent in October, might rise to 9.1 percent, which could spark another recession.

A BIG DEAL

White House and congressional leaders continue to offer hope — usually privately — that they can reach a grand bargain not only to get over the cliff but also to begin chipping away at the federal deficit with structural changes that eluded them last year.

Getting to that point in the next few weeks is doubtful, if only because big things such as overhauling the tax code or revamping Medicare aren’t going to be decided — let alone clear Congress — before the lame-duck session ends in about a month.

Still, such changes — or at least the framework for such alterations — aren’t completely out of the question.

“Nothing is agreed to until everything is agreed to,” said veteran Washington budget analyst Stan Collender. And with no general election for nearly two years, the time will never be better for tough votes.

There are some telltale signs that huge things could happen, notably that both sides aren’t talking as harshly as they once did. The day after the election, House Speaker John Boehner, R-Ohio, signaled that he was ready to talk about revenue, and some of his key allies have made similar overtures.

TAXING TOP EARNERS

This is the most unlikely scenario, but it also isn’t out of the question. The Senate passed legislation in July to continue the income tax cuts for everyone except the top earners. It’s gone nowhere in the Republican-dominated House.

House Democrats began an effort Tuesday to force the measure to the floor. Their “discharge petition” needs 218 signatures. The House has 192 Democrats, so it would need considerable Republican support.

While that’s unlikely — such petitions rarely succeed because they’re seen as challenges to a long-entrenched process — Democrats are hammering Republicans as tacitly endorsing higher taxes by not signing the petition.

“House Republican leaders are holding the middle class hostage to protect millionaires,” said Rep. Steve Israel of New York, the chairman of the Democratic Congressional Campaign Committee. About all that anyone can agree on so far is that talks need to continue — and out of the public eye.

“We’ve wasted an enormous amount of time here sparring back and forth in public,” said Senate Republican leader Mitch McConnell of Kentucky.

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