Senate Minority Leader Mitch McConnell (R-Ky.) and Vice President Joe Biden engaged in furious overnight negotiations to avert the fiscal cliff and made major progress toward a year-end tax deal, giving sudden hope to high-stakes talks that had been on the brink of collapse, according to sources familiar with the discussion.
McConnell and Biden, who served in the Senate together for 23 years, are closing in on an agreement that would hike tax rates for families who earn more than $450,000, and individuals who make more than $400,000, according to sources familiar with talks. That would mark significant concessions for both men, particularly for McConnell. President Barack Obama campaigned on raising taxes for families who make more than $250,000, but McConnell has long been dead-set against any tax increases, warning they would jeopardize the economy.
However, there has been no agreement over "turning off" the sequester, tens of billions of dollars in spending cuts that will hit the Pentagon and other federal agencies beginning on Jan. 2, the sources said. House Republicans have been demanding spending cuts, and any deal without them will be a heavy lift.
Congressional Democratic sources raised concerns late Monday morning that a Biden-McConnell deal wouldn't have the votes to clear Congress, and Reid took to the floor warning that there were "a number of issues of which the two sides are still apart" and that the Senate was not prepared yet to hold a vote on the matter.
There were serious problems emerging on the left. Sen. Tom Harkin (D-Iowa), an influential liberal, warned on the floor that the discussions over a deal on the estate tax and raising the threshold to $450,000 "doesn't sit well with this senator." He called the outlines of a possible deal is "grossly unfair" and a "tough pill to swallow."
The last-ditch horse-trading underscored the urgency of the situation because if no deal is reached, every income group will be hit with a tax hike starting Tuesday.
Crucial conversations between Biden and McConnell occurred early Monday morning, at 12:45 a.m. and 6:30 a.m., aides said.
The vice president and the Senate minority leader only began talking Sunday, after negotiations between Senate Majority Leader Harry Reid (D-Nev.) and McConnell sputtered.
Sources close to the talks said a deal is now more likely to come together but cautioned that obstacles remain, including how Speaker John Boehner and House Republican leaders react to any tentative agreement. Boehner has vowed to bring any bill the Senate passes to the House floor, but House Republicans could amend the package, which would throw any agreement into flux
"The leader and the VP continued their discussion late into the evening and will continue to work toward a solution. More info as it becomes available," a McConnell spokesman said.
It comes as Washington awakens on a chilly New Year's eve to a daunting reality: If lawmakers and the White House are not able to broker a last-minute deal on the fiscal cliff, the country will actually go over it.
Going over the cliff is not how Americans want to start 2013: with hefty new tax hikes and spending cuts that could send the stock market plummeting, slash defense spending and interrupt an economic recovery that was just beginning to spark.
But after a weekend in which senators haggled over one obstacle to agreement after another, going over the cliff looked like a real possibility, if not a probability. The McConnell-Biden talks look like they could avert this potential disaster.
The main hurdle remained over which income groups would be hit with tax hikes in the new year.
Democrats had proposed raising taxes on individuals who make more than $360,000 annually and families whose income is more than $450,000. And McConnell had countered with a tax hike for individuals above $450,000 and couples who earn more than $550,000 earlier in the evening Sunday.
But Democratic sources close to the talks said McConnell would have to go significantly lower to win support from their party, although that would make it more difficult for the GOP leader to win over fellow Republicans.
Estate taxes, a chief concern for McConnell, remained a sticking point as well.
The back-and-forth shows the difficult political calculus both sides were making on the eve of a critical deadline. The drawn-out negotiations were frustrating to many in both parties who are eager to see an agreement reached.
"I've been here four years, and I cannot believe negotiations have reached this level of gridlock. I am fed up with the stalling," said Alaska Democratic Sen. Mark Begich.
With no deal at hand, Senate leaders were preparing alternative plans to avoid the cliff's full impact, including a fallback option floated by Democrats to force through an extension of current tax rates for families who make less than $250,000, as well as new spending measures to extend jobless benefits for 2 million unemployed Americans. Republicans were still weighing whether they'd demand 60 votes for passage of even a limited measure, though the prospects for such a bill in the GOP-controlled House remained bleak.
Such a deal wouldn't fend off the sequester. Federal agencies, including the Pentagon, will be required to cut $109 billion over the next nine months, raising the specter of furloughs and layoffs for federal employees.
The House Republican leadership moved Sunday night to give itself expedited authority to bring legislation to the floor in case the Senate actually passes a compromise bill Monday.
House Republicans, who turned against their own leadership last week, rallied around Boehner on Sunday night, giving him a round of applause for his work in negotiating over the fiscal cliff.
But the more both sides negotiated this weekend, the more they seemed to remain in place.
After loud Democratic protests on Sunday, Republicans agreed to take off the table a controversial provision that would have cut Social Security benefits. But more hurdles soon emerged, including over automatic spending cuts set to take place next year, and the rates for estate taxes that are set to balloon if no deal is reached by the new year.
Key to the stalemate is the growing tension between McConnell and Reid, the pair who took over the fiscal cliff talks Friday following weeks of fruitless discussion between Obama and Boehner.
Democrats are angry at McConnell, believing he's adopted for the Senate the "majority of majority" standard Boehner has demanded in the House. McConnell does not believe Reid is playing straight with him, saying the Nevada Democrats has shown little urgency by dragging his feet through the weekend of talks.
McConnell even called in Biden to help break the logjam, although the vice president has offered nothing different from Reid's position.
"There is still significant distance between the two sides, but negotiations continue," Reid said Sunday evening, announcing that the chamber would return Monday morning.
Biden's inclusion in the negotiations -- similar to the role he played in previous legislative fights involving McConnell, an old Senate colleague -- sets up a "good cop, bad cop" scenario for Democrats, with Reid playing the heavy and Biden able to work more closely with GOP leaders on Capitol Hill.
Republicans, for their part, aren't sure Reid and Obama even want a deal, believing Democrats figure that they win politically if no agreement is reached and the country goes off the cliff.
Republicans were still weighing their strategy if Reid moves forward with a fallback plan. If they consent to a simple majority vote, the bill could pass the Senate, putting House leaders in a difficult position on the eve of a cliff fall. But if Senate GOP-ers demand 60 votes, they could be blamed for blocking a last-ditch deal to avert massive tax hikes.
"We'd like to be able to offer some amendments" to a cliff deal, said Sen. John Cornyn of Texas, the incoming GOP whip. "It depends on the majority leader."
House Republicans -- who brought their chamber back to session Sunday -- are waiting for the Senate to pass a bill, and don't plan to move any bill on their own.
Seung Min Kim, Ginger Gibson, Kate Nocera and Carrie Budoff Brown contributed to this report.
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