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Fiscal Cliff Averted: How The White House Got A Deal Before The Deadline

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FISCAL CLIFF AVERTED
AP

WASHINGTON -- President Barack Obama badly wanted to keep the country from going over the fiscal cliff.

In the Oval Office on Nov. 16, 10 days after his reelection, he opened a meeting of congressional leaders by warning that there was "tension" in the markets over the possibility that automatic tax hikes and spending cuts might go into effect after the new year. There was little evidence of such tension at the time, but the worry within in the administration was sincere.

So it was surprising for attendees to hear the president say, in a separate Oval Office meeting on Dec. 28, that he was willing to risk the cliff if he couldn't get a good deal. For that deal, Obama offered House Speaker John Boehner (R-Ohio) and Senate Minority Leader Mitch McConnell (R-Ky.) two possible frameworks: Raise taxes on income above $400,000 and revert to 2009 estate tax rates, or make the income threshold $250,000 and extend the 2012 estate tax rates, which were lower.

But was he really willing to follow through on his threat?

Senate Majority Leader Harry Reid (D-Nev.) wasn't sure he had heard Obama right. On the ride back to the Capitol, his chief of staff, David Krone, suggested he call to confirm. The president reiterated his position: strike a good deal, he told Reid, or let it all go.

The moment was one of several that defined the frantic final days of fiscal cliff negotiations, in which bargaining tactics and political willpower were routinely tested, according to sources with knowledge of the talks. The final result would be a deal that pleased few in either party but also illustrated a more seasoned legislative approach from the White House, which drummed up public support for its position and used the prospect of inaction as a cudgel. As one Republican aide recalled, during a mid-December meeting, Obama went so far as to warn House Republicans that he would "scapegoat them" for allowing the cliff to be hit, beginning with "his inauguration speech and continuing into his first State of the Union."

In actuality, however, the administration was far more nervous about the prospect of going over the cliff than it let on. Treasury Secretary Timothy Geithner was among those sounding the alarm about the economic impact of a missed deadline. Tax rates could be fixed in early January, he argued, but the sequestration cuts would be harder to resolve. And while it was comforting to assume that a good deal could be managed in the next Congress, legislative realities were more complicated.

"We'd have to start all over again," said one source close to negotiations. "And it would start in the House, because it's a revenue measure. The Republican-run House."

Public fretting, however, would send a bad signal to Republicans and weaken the White House's negotiating position. And so while he harbored concerns, Geithner himself would tell the press that the administration was "absolutely" willing to go into the new year without a deal. As talks hit their critical final stage, the president was of the same mindset.

"We didn't need this self-inflicted wound," said the source. "But, in the end, he was at peace going over the cliff. And there were many moments where we thought it was happening."

* * * * *

McConnell ignored the president's insistence that there were only two possible frameworks for a deal. He went with a third, a proposal that called for income tax rates to increase at $500,000 for individuals and $750,000 for families, as well as the lower 2012-level estate rates.

But the president's tone during that Dec. 28 White House meeting did seem to have an effect. In sending the offer over, a McConnell aide called it "underwhelming but designed to get the ball rolling," according to a copy of the email provided to The Huffington Post. It included a plan to cut $30 billion to Medicare beneficiaries by means-testing benefits. A McConnell aide later explained that the provision was chosen because the president had supported it in past debt-reduction talks.

The details of the subsequent negotiations were provided by several sources, and confirmed by the notes of a Democratic source involved in the talks.

Reid countered by offering to extend all income tax rates on the first $275,000 for individuals and $350,000 for families. He backed off demands on the estate tax, calling for a one-year increase -- from 35 percent at a $5 million threshold to 45 percent at a $3.5 million threshold -- rather than a permanent one.

McConnell came back with a threshold of $500,000 in income for both individuals and families. It was progress toward Reid's position. But the minority leader also proposed staving off the sequester for a year and paying for it by cutting veterans benefits and Social Security via the so-called chained CPI.

Reid rejected the Social Security cuts, just as Obama had done in the meeting when Republicans floated them. He responded with rates of $360,000 for individuals and $450,000 for families. He also said the estate tax issue could be decided by a vote on an amendment on the Senate floor -- as McConnell had asked -- but demanded a two-year extension of the sequester.

McConnell countered by moving to $450,000 and $550,000, but continued to insist on using chained CPI, this time to offset a one-year extension of emergency unemployment benefits and a one-year delay on the sequester.

The minority leader's staff was itching to move forward, and suggested the aides get together to start drafting legislation. But Reid's staff, worried that Republicans would lock up the cuts, draft them, and then bail on the tax deal, asked for more time to review.

Reid's office and the White House wondered if McConnell's offer could be built it into something grander. They briefly considered adding entitlement cuts, including chained CPI, to a major counter-offer that would ask for an additional $600 billion in revenue through tax reform, according to a Senate source involved in the talks. But Reid ultimately decided it was too late for the grand deal. He crumpled up the proposal and tossed it into his burning fireplace.

Likewise, a senior administration official said that a formal offer was never made.

"The idea that we put CPI in a paper and sent it over to Sen. McConnell never would have happened," the official said. "We never put it on any paper at the White House, period. We never considered it here in the context of a small deal."

Instead, Krone called McConnell's chief of staff back with Reid's counter: There will be no more concessions. "You know where we stand," he said.

McConnell called for Vice President Joe Biden.

* * * * *

The White House was at a crossroads. It could back Reid and dare Republicans to vote against his offer, or pick up the baton from McConnell.

It chose the latter. Concerns about the economic fallout from going over the cliff compelled aides to try to salvage a deal. But they were also confident that Biden could wring more out of McConnell. Their shared history in the Senate would remove pretension from the talks. More than that, the administration believed the minority leader wanted to play ball.

When all four congressional leaders convened at the White House on Dec. 28, the mood was surprisingly cordial. Minutes earlier, Boehner had said "go fuck yourself" to Reid after Reid had called him a "dictator" on the Senate floor. And yet, that hadn't affected talks. One person standing nearby said repeated laughter could be heard coming from the room. After the meeting ended, McConnell huddled with negotiators to discuss the art of the possible.

He was engaged, the White House felt, and seemed to remain so up through the morning of Dec. 30.

"It is clear that McConnell wanted a deal," said the source close to the negotiations. "He could have gone to the floor and blown this up but he didn't. It was like, 'Wow, he does not want to walk away.'"

How badly the White House wanted a deal must have tantalized McConnell too. Over the course of 13 phone calls with the minority leader, Biden moved higher on tax rates, dropped a demand for a longer delay in the sequester and backed off a debt ceiling increase.

In each case, the administration saw silver linings. It had entered the final stages of negotiations worried that Reid, responding to the concerns of some in his party, would end up at a income threshold of $500,000.

"The dirty little secret is that a lot of Democrats never wanted $250,000," a Democratic aide said.

The White House got McConnell to agree to tax hikes after the first $400,000 in income for individuals and $450,000 for married filers.

Under the Biden-McConnell arrangement, sequestration would be put off for two months, which meant another spending fight in the near future. But the president's team was already gearing up for one, since the continuing resolution to fund the government was set to expire around the same time.

And while the issue of the debt ceiling was left unresolved, that wouldn't matter so long as the White House stuck to its commitment not to negotiate on it. It's a point Reid directly impressed on Obama during a phone call, when he noted that in February there would need to be a $2 trillion hike in the debt ceiling.

"What do you do? You already took the 14th Amendment off the table," Reid said, according to notes of the call.

The president, echoing his tougher-lined approach to negotiations, insisted he simply wouldn't enter into talks. As one senior administration official described the plan: when Republicans call to talk about the debt ceiling, they'll get a voicemail. Eventually, the inbox will be full.

By Monday night, as the clock ticked down to a New Year, the two sides had a deal.

Whether it could pass the House was another question. The president had not been in touch with Boehner since that Dec. 28 meeting. The speaker's decision to remove himself from the talks meant that McConnell had to count Republican votes in both chambers. The Senate was relatively easy, but the House proved to be a problem. Conservatives there objected to the absence of spending cuts in the deal and threatened to amend and send it back to the Senate.

The administration assumed, once again, that the deal was dead. There was little appetite in the Senate to re-open negotiations and even less time to do so. Frantically, aides began laying the framework to saddle House GOP leadership with the blame. But before that effort gathered serious steam, Boehner showed that he did, indeed, have a role to play. Breaking with the Hastert Rule, which says that no bill should come to the floor without a majority of Republicans behind it, Boehner teamed with House Minority Leader Nancy Pelosi (D-Calif.) to cobble together enough votes to pass the bill.

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