WASHINGTON - Racing the clock, the White House reached a New Year's Eve accord with Senate Republicans late Monday to neutralize across-the-board tax increases and spending cuts in government programs due to take effect at midnight, according to administration and Senate Democratic officials.
Under the deal, taxes would remain steady for the middle class and rise at incomes over $400,000 for individuals and $450,000 for couples - levels higher than President Barack Obama had campaigned for in his successful drive for a second term in office.
Spending cuts totaling $24 billion aimed at the Pentagon and domestic programs would be deferred. That would allow the White House and lawmakers time to regroup before plunging very quickly into a new round of budget brinkmanship certain to revolve around Republican calls to rein in the cost of Medicare and other government benefit programs.
Officials also decided at the last minute to use the measure to prevent a $900 pay raise for lawmakers due to take effect this spring.
Democratic senators said they expected to vote on the measure later during the night. They spoke after a closed door session with Vice President Joseph Biden, who brokered the deal with Senate Republican leader Mitch McConnell.
"The argument is that this is the best that can be done on a bipartisan basis," said Sen. Dianne Feinstein, D-Calif., when asked about the case the vice president delivered behind closed doors.
Passage would send the measure to the House, where Speaker John Boehner, R-Ohio, refrained from endorsing a package as yet unseen by his famously rebellious rank-and-file.
He said the House would not vote on any Senate-passed measure "until House members - and the American people - have been able to review" it.
The House Democratic leader, Rep. Nancy Pelosi of California, issued a statement saying that when legislation clears the Senate, "I will present it to the House Democratic caucus."
Without legislation, economists in and out of government warned of a possible recession if the economy were allowed to fall over a fiscal cliff of tax increases and spending cuts.
And while the deadline to act was technically midnight, Obama's signature on legislation by the time a new Congress takes office at noon on Jan. 3, 2013 - the likely timetable - would eliminate or minimize any inconvenience for taxpayers.
Even by the dysfunctional standards of government-by-gridlock, the activity at both ends of historic Pennsylvania Avenue was remarkable as the administration and lawmakers spent the final hours of 2012 haggling over long-festering differences.
"One thing we can count on with respect to this Congress is that if there's even one second left before you have to do what you're supposed to do, they will use that last second," the president said in a mid-afternoon status update on the talks.
As darkness fell on the last day of the year, Obama, Biden and their aides were at work in the White House, and lights burned in the House and Senate.
Democrats complained that Obama had given away too much in agreeing to limit tax increases to incomes over $450,000, far above the $250,000 level he campaigned on. Yet some Republicans recoiled at the prospect of raising taxes at all.
A late dispute over the estate tax produced allegations of bad faith from all sides.
After hours of haggling, Biden headed for the Capitol to brief the Democratic rank and file.
Earlier, McConnell had agreed with Obama that an overall deal was near.
In remarks on the Senate floor, he suggested Congress move quickly to pass tax legislation and "continue to work on finding smarter ways to cut spending" next year.
The White House and Democrats initially declined the offer, preferring to prevent the cuts from kicking in at the Pentagon and domestic agencies alike. A two-month compromise resulted.
Officials in both parties said the agreement would prevent tax increases at incomes below $400,000 for individuals and $450,000 for couples.
At higher levels, the rate would rise to a maximum of 39.6 percent from the current 35 percent.
The deal also would raise taxes on the portion of estates exceeding $5 million to 40 percent. At the insistence of Republicans, the $5 million threshold would rise each year with inflation.
Much or all of the revenue to be raised through higher taxes on the wealthy would help hold down the amount paid to the Internal Revenue Service by the middle class.
In addition to preventing higher rates for most, any agreement would retain existing breaks for families with children, for low-earning taxpayers and for those with a child in college.
The legislation leaves untouched a scheduled 2 percentage point increase in the payroll tax, ending a temporary reduction enacted two years ago to help revive the economy.
Officials said the White House had succeeded in gaining a one-year extension of long-term unemployment benefits about to expire on an estimated two million jobless.
It was unclear whether the legislation would prevent a 27 percent cut in fees for doctors who treat Medicare patients. Nor did officials immediately say if it would include a provision to block a near-doubling of milk prices.
Even as time was running out, partisan agendas were evident.
Obama used his appearance not only to chastise Congress, but also to lay down a marker for the next round of negotiations early in 2013, when Republicans intend to seek spending cuts in exchange for letting the Treasury borrow above the current debt limit of $16.4 trillion.
"Now, if Republicans think that I will finish the job of deficit reduction through spending cuts alone. ... then they've got another think coming. ... That's not how it's going to work at least as long as I'm president."
Inhofe supports deal to avoid fiscal cliff
Below is U.S. Sen. Jim Inhofe's statement on voting to avert a fiscal cliff and delay sequestration for two months. The deal permanently extends Bush tax cuts for a majority of Americans, prevents a death tax increase, and fixes the Alternative Minimum Tax (AMT):
“While this deal to avoid the fiscal cliff is not perfect, Senate Democrats have caved to making permanent the Bush tax cuts for 99 percent of Americans,” said Inhofe. “The deal will cement the tax cuts for individuals making less than $400,000 a year or $450,000 for families, and permanently fix the Alternative Minimum Tax (AMT). Even though President Obama wanted to extend the death tax exemption only up to $1 million, this deal extends the exemption for up to $5 million, $10 million for couples. As I have travelled around Oklahoma, it has been clear to me that this is the single most important issue for our farmers, ranchers, and family owned businesses.
"One of my greatest concerns about the fiscal cliff has been the devastating cuts that would happen to our military due to defense sequestration. This deal avoids those cuts for two months to allow for a better solution. While I would like to have sequestration addressed, I am hopeful the deal’s two-month delay will help us better prioritize deep spending cuts while protecting our military and national security.
"The deal also includes an important one year extension of the farm bill, and extends for one year provisions that prevent doctors from being forced to take rate cuts for treating Medicare patients.
"I do not agree with the deal’s extension of unemployment benefits for another year or that it only achieves a small deficit reduction. I look forward to negotiating more spending cuts when we deal with the debt limit increase. Even though President Obama wanted that included in this deal, we are wisely waiting to address that separately so that we can have better spending cuts. After four years of Obama running up $5.3 trillion in deficit spending, any deal to raise the debt ceiling must be contingent upon making significant cuts to get our fiscal house in order.
"This deal should be seen as a victory for conservatives as it achieves for the first time in decades a bipartisan agreement for permanent tax cuts for a majority of Americans. These tax cuts will help to restore certainty and encourage economic growth."