GOP, Democrats seem to harden stance on debt

President Barack Obama plunged into deadlocked negotiations to cut government deficits and raise the nation's debt limit Monday, and the White House expressed confidence a "significant" deal with Republicans could be reached. But both sides only seemed to harden their positions as the day wore on, the administration insisting on higher taxes as part of the package but Republican leaders flatly rejecting the idea.

Obama and Vice President Joe Biden met with Senate Majority Leader Harry Reid, D-Nev., for about 30 minutes at the White House, and then met with Senate Republican leader Mitch McConnell of Kentucky for about an hour in the early evening.

White House spokesman Jay Carney said Obama reported after the morning session that "everyone in the room believes that a significant deal remains possible." But Carney also affirmed that Obama would only go for a deficit-reduction plan that included both spending cuts and increased tax revenue, an approach that Republicans say would never get through Congress.

Said Carney: "It's the only way to get it done if you want to do it right."

Obama and the vice president spent more time with McConnell than they did with Reid, an indication of the differences they still need to bridge. McConnell also was seen speaking with White House Chief of Staff Bill Daley moments before his meeting with Obama and Biden.

"The meeting concluded but they will continue to talk," McConnell spokesman Don Stewart said afterward.

Hours earlier McConnell reaffirmed Republican opposition to more tax hikes in a speech from the Senate floor.

"It's time Washington take the hit," he said, "not the taxpayers."

McConnell said any tax increase or new spending would be counterproductive to economic recovery, and he pointed out that Democrats had been unable to pass tax increases on the wealthy when they controlled both chambers of Congress last year.

"Let's move past tax hikes, talk about what's actually possible, and let's talk about what has and hasn't worked over the past two years," said the Kentucky Republican.

Reid said, "I hope my Republican colleagues will put the economy ahead of politics." Speaking on the Senate floor, he said, "I hope they'll join us to create jobs and set aside their desire to please the tea party and defeat President Obama."

At issue is not just the staggering national debt but a showdown on the federal borrowing limit that carries enormous risks.

Absent an agreement that cuts long-term deficits, Republicans say they will not vote to increase the nation's borrowing, which will exceed its $14.3 trillion limit on Aug. 2. The administration has warned that if Congress does not raise the debt ceiling, it could mean the first U.S. financial default in history and send economic shockwaves around the world.

To meet government obligations, a two-year increase in the debt ceiling would have to be about $2.4 trillion. Republicans are insisting on deficit reduction of a similar amount over 10 years.

So far the financial markets remain unrattled by the impasse, and some say it might take a massive market upheaval to move Congress to pass an increase in the debt ceiling. That's what it took in 2008 for Congress to approve the financial bailout known as the Troubled Asset Relief Program. Politically, raising the debt ceiling is considered a more difficult vote than the bank bailout plan.

Failure to raise the ceiling "would do serious damage," Said Mark Zandi, chief economist at Moody's Analytics whose views are frequently cited by the Obama administration. "It will unhinge the already very fragile collective psyche."

Zandi said a deficit reduction plan that includes some tax increases would be "more credible and more appropriate from an economic perspective."

But he said that if Republicans are being asked to give up their deep-seated opposition to tax increases, then Obama needs to abandon a major campaign promise, such as his demand that the wealthy give up their Bush-era tax cuts.

"The president needs to take a chance himself, and do something that shows he's willing to give up something that's very large to move this forward," Zandi said in an interview.

The president stepped up his personal involvement in negotiations after bipartisan talks led by Biden stalled last week. Republican lawmakers abandoned the negotiations, saying the issues still on the table had to be addressed by the president.

Obama already has met privately with House Speaker John Boehner, R-Ohio, and with House Democrats.

Until Friday, Biden had held a series of meeting over several weeks with bipartisan teams from the House and Senate, focusing on areas where the two sides were amenable to cuts until the dispute over taxes caused Republicans to walk out.

Carney rejected suggestions that Obama should have become more involved earlier. "If you honestly believe that the public is out there wondering why the president wasn't in every one of these meetings, you know, I think that's nuts."

The White House is pushing for some tax increases on the wealthy or the elimination of tax breaks for big companies and wealthy individuals as part of a deficit-cutting plan. During the Biden-led negotiations, Democrats proposed about $400 billion in additional tax revenue, including ending subsidies to oil and gas companies, an idea that has failed previously in the Senate.

The administration also would tax private equity or hedge fund managers at higher income tax rates instead of lower capital gains rates, change the depreciation formula on corporate jets and limit itemized deductions for wealthy taxpayers. It also has called for repealing a tax benefit for an inventory accounting practice used by many manufacturers.

Republicans are demanding huge cuts in government spending. While they are insisting there be no tax increases, they have been willing to consider other forms of revenue, particularly higher user fees.

"Revenues have never been off the table," said Sen. Jon Kyl of Arizona, the Senate's Republican participant in the Biden talks. "There are some user fees that are probably way low compared to when they were originally set."

Obama's budget wants $85 billion in new user fees over 10 years, including raising the airline passenger security fee from a maximum of $5 per one-way trip to $11. Other proposals range from Food and Drug Administration food inspection fees to duck hunting fees.The $85 billion also includes federal auction of parts of the broadcast spectrum and the sale of surplus federal property.

Complicating matters is the congressional schedule. While the Senate is in session, the House is off this week ahead of the July 4 holiday. The House is scheduled to return next week when the Senate will be away. That makes it difficult for leaders in both chambers to find consensus among their respective memberships.

"It will take time, and that is a bit troublesome," Kyl said. "It will take time to both reach the agreement, to put it all together and to debate it on the floor. Nobody wants this to be just parachuted in three days before they vote on it. They want time to take it back to their constituents, talk about it, debate it on the floor."

Carney wouldn't set a deadline for a deal, saying he didn't want to name a "token timetable." He said Obama and Biden would hold additional meetings with congressional lawmakers, though none is scheduled at this point.


Associated Press writers Julie Pace, Andrew Taylor and Ben Feller contributed to this story.