Boehner proposes short-term tax fix on incomes above $1M to avert ‘fiscal cliff'

Proposal lets rates go up on incomes above $1M

House Speaker John Boehner will propose letting tax rates go up on incomes above $1 million as a short-term step to avoid some of the fiscal cliff while continuing to negotiate a broader deal with President Barack Obama, a Republican source said Tuesday.

The move is considered a "plan B" by Republicans, who face public blame if the lack of an agreement causes everyone's taxes to go up next year as part of the fiscal cliff.

According to the GOP source, who spoke on condition of anonymity, Boehner was meeting Tuesday morning with House Republicans to explain the proposal, which goes against what had been a hardline stance against any rise in tax rates.

Boehner already conceded the issue as part of the broader talks, and his proposal now demonstrates the lack of leverage Republicans have on the issue.

Obama has made clear that allowing tax rates to go up on top income brackets was a non-negotiable demand in order to ensure that the wealthy contribute more to deficit reduction.

Under Obama's plan, which polls consistently show has strong public support, tax rates from the Bush era would be extended for families who earn less than $250,000. The higher rates of the 1990s would be assessed on incomes above that threshold.

As part of the broader talks, Obama on Monday raised the threshold for the higher tax rates to $400,000.

The Boehner proposal would set the threshold at $1 million, and it was unclear if the plan would get support from Obama and Democrats.

According to sources familiar with the negotiations, Boehner's plan B approach was expected, and the broader agreement still under negotiation remains the desired outcome.

Boehner planned to tell his conference that the end-of-year expiration of Bush tax cuts would mean everyone's taxes will go up, the Republican source said. The speaker would describe his motivation as preventing as much of that tax rate hike as possible while continuing to negotiate a more comprehensive agreement, the source said.

Obama previously said that once Republicans agreed to higher tax rates on wealthy Americans, he would be willing to compromise on spending cuts and entitlement reforms sought by Boehner.

On Monday, Obama responded to the latest GOP counter-offer with concessions on tax increases and spending cuts, according to a source familiar with the discussions.

Obama's latest offer brought the two sides billions of dollars closer, but also generated protests from some in the Democratic base because it included some benefit cuts in entitlement programs such as Social Security, Medicare and Medicaid.

Justin Ruben, executive director of MoveOn, the liberal movement that backed Obama's presidential campaigns, said the group's members would consider any benefit cuts "a betrayal that sells out working and middle-class families."

In particular, he cited concessions that Obama made in his counter-offer on Monday, including a new formula for the consumer price index applied to benefits.

"If such a deal were proposed by the president and speaker, MoveOn members would expect every Senate and House Democrat to do everything in their power to block it," Ruben said.

Over the weekend, Boehner offered for the first time to accept tax rate increases on household income of $1 million and above, sources said. The speaker also offered to allow the president to raise the debt ceiling in 2013 without a messy political fight, another key Obama demand.

In response, Obama on Monday offered $200 million in new cuts to discretionary federal government spending, divided evenly between defense and non-defense programs.

The president also included for the first time the chained CPI sought by Republicans, and dropped an extension of a payroll tax cut from the past two years.

According to the source who provided CNN with details of Obama's counter-offer, it includes $1.2 trillion in revenue increases and $1.22 trillion in spending reductions.

However, Boehner's office disputed those figures.

"Any movement away from the unrealistic offers the president has made previously is a step in the right direction, but a proposal that includes $1.3 trillion in revenue for only $930 billion in spending cuts cannot be considered balanced," Boehner spokesman Brendan Buck said. "We hope to continue discussions with the president so we can reach an agreement that is truly balanced and begins to solve our spending problem."

Obama and Boehner met face-to-face at the White House on Monday for 45 minutes, their third such meeting in eight days in a sign of an acceleration in the fiscal cliff negotiations.

Hours before news of the president's latest offer emerged Monday, White House spokesman Jay Carney made it clear that more work needed to be done.

"The president's proposal is the only proposal that we have seen that achieves the balance that is so necessary" between revenue and cost-cutting, said Carney, who refused to discuss specifics.

Congress had been scheduled to end its work last week, but legislators returned to Washington on Monday and leaders warned members to be prepared to stay until Christmas and return after the holiday until year-end.

"It appears at this stage -- we'll see if anything changes -- but it appears we're going to be coming back the day after Christmas to complete work on the fiscal cliff," Senate Majority Leader Harry Reid, D-Nev., said Monday.

Last week, U.S. Rep. Chris Van Hollen, D-Md., said a deal would have to be reached by Christmas to allow time for the legislative process to approve the required measure or measures by the end of the year.

Obama's latest proposal included $130 billion in spending savings due to changes in the CPI, which is applied to many entitlement benefits to protect participants against rising prices.

The chained CPI includes assumptions on consumer habits with regard to rising prices, such as seeking cheaper alternatives, and would result in smaller benefit increases in future years. Labor unions and advocacy groups for the elderly oppose it.

Republican aides estimate that the CPI would increase tax revenues by an additional $95 billion over Obama's estimated $1.2 trillion, putting the total revenue figure of the president's latest proposal closer to $1.3 trillion.

The GOP aides also do not count Obama's estimated $290 billion in savings on national debt interest accumulation because they do not consider these savings real cuts. Therefore, the Republican aides said, Obama's plan fails to offer a 1-1 ratio of spending cuts and revenue that Boehner would consider balanced.

Conservatives trying to shrink the federal government generally oppose increasing tax revenue. They are particularly opposed to higher tax rates because history shows that once rates go up, it is difficult to later reduce government revenue by lowering them again.

Obama and Democrats argue that increased revenue, including higher tax rates on the wealthy, must be part of broader deficit reduction to prevent the middle class from getting hit too hard.