Taxpayers caught in a fiscal cliffhanger

WASHINGTON - With verdicts from voters fresh on their minds, Minnesotans in Congress return to work this week charged with nothing less than trying to alter the course of the U.S. economy.

They have exactly 50 days.

The alternative is a "fiscal cliff," a term used by Federal Reserve Chairman Ben Bernanke to warn of the dramatic consequences should Congress fail to act on a toxic brew of tax hikes and massive spending cuts set to take effect at midnight on Dec. 31.

In Minnesota, that could affect everything from the size of paychecks to Medicare.

The Minnesotans with a role in this high-stakes political showdown -- two Democratic senators and eight U.S. House members evenly divided between Republicans and Democrats -- are a microcosm of the divide facing the entire Congress.

As President Obama and congressional leaders begin bipartisan talks, the question ahead is whether there is a broad debt deal that can bring together Minnesota Democrats like Betty McCollum and Keith Ellison, co-chair of the Congressional Progressive Caucus, and Minnesota Republicans like Chip Cravaack and Michele Bachmann, founder of the House Tea Party Caucus.

All four voted against the compromise that ended the debt ceiling crisis of 2011, a deal that saved the nation from missing a debt payment for the first time in history. Ellison and McCollum, representing safe Democratic districts in the Twin Cities, objected to cuts on the spending side; Cravaack and Bachmann maintained ideological objections to raising the nation's debt level. Cravaack went down to defeat last week; Bachmann barely survived a close call.

On the plus side, the one-two punch of higher taxes and spending cuts would reduce the deficit by an estimated $560 billion this year. The potential downside: Congressional budget experts say that ending the Bush-era tax rates simultaneously with deep domestic and defense spending cuts agreed to as part of the debt-ceiling deal could shave off 4 percentage points of gross domestic product (GDP). At the economy's current tepid growth rate, that could throw the nation back into recession, costing as many as 2 million jobs.

"In reality, we're facing a jobs cliff," said Minnesota Republican Erik Paulsen, a member of the tax-writing House Ways and Means Committee.

'Trigger'

A product of gridlock and brinkmanship, this moment never was supposed to happen. It was supposed to be a negotiating "trigger," a threat so dire that nobody thought it would arrive.

"This is a time for grownups to get things done," said Sen. Amy Klobuchar, a Democrat who was reelected by a comfortable 65 percent of the vote.

"I'm open to compromise. I'm open to new ideas. I'm committed to solving our fiscal challenges, but I refuse to accept any approach that isn't balanced," Obama said in the East Room, joined by Vice President Joe Biden.

Boehner already has reacted with conciliatory words, saying, "We are ready to be led."

Still, the elections did not fundamentally change the balance of power in Congress.

The main divide remains Democrats' demands for an end to Bush tax cuts for those making more than $250,000. "While our next plan will require further spending cuts," said Democratic Sen. Al Franken, "it must include significant new revenues, including those that ensure that the top 2 percent of our country's wealthiest pay their fair share."

But a Republican retreat on taxes seems unlikely. Boehner already has warned that tax hikes on anyone are unlikely to pass in the House, where nearly every member of the Republican majority is pledged to vote against them.

Lawmakers on both sides say resolving the AMT problem might be a higher short-term priority. It would be easier to do by year's end than a "grand bargain" on the debt, which could be pushed later into 2013 without causing immediate economic havoc. While lawmakers could agree to push back a deadline on a debt deal, the IRS needs to know what the AMT "fix" is by the end of the tax year.

Loopholes or rates?

On the nation's $16 trillion debt problem, both sides point hopefully to the debt reduction commission, led by former Clinton administration Chief of Staff Erskine Bowles and former Republican Sen. Alan Simpson, which provide a framework for spending cuts combined with tax reforms that eliminate loopholes, a way of raising new revenues without necessarily raising tax rates.

"I believe the focus should continue to be on tax reform to help grow the economy and bring in more revenue," Paulsen said. But even pro-business Democrats like Klobuchar say a truly bipartisan approach means asking more of the wealthy, a proposition championed in Minnesota Gov. Mark Dayton's 2010 election campaign, and by Obama in his reelection campaign. On Friday, Obama called the issue "central" to his candidacy.

Meanwhile, economists say that uncertainty about what Congress will do already is leading to market instability, sluggish economic growth, slower hiring and a ratings downgrade of U.S. debt.

"The president has, I believe, won a mandate," said former Michigan Gov. John Engler, a Republican who heads the Business Roundtable, CEOs representing many of the country's largest corporations, including Minnesota giants Ameriprise Financial, General Mills, Medtronic, Honeywell International, Target and UnitedHealth Group.

But Greg Casey, president of the Business-Industry Political Action Committee, bemoaned what he called a "fire drill" approach by Congress. Unless governing supplants politics in the lame-duck session, Casey warned, the country risks having "a fire drill to take care of a fire drill."

Kevin Diaz is a correspondent in the Star Tribune Washington Bureau.