Updated March 27 at 11:27am

Taxes set to rise for U.S. workers as budget deal elusive


WASHINGTON - With taxes set to increase for almost every U.S. worker at midnight, Congress hasn’t reached a budget deal that Democrats and Republicans say is necessary to prevent a blow to the U.S. economy.

Private talks between Senate Majority Leader Harry Reid and Minority Leader Mitch McConnell that began Dec. 28 stalled yesterday because of disputes over income tax rates, the estate tax and other issues.

McConnell, a Kentucky Republican, reached out to Vice President Joe Biden in an effort to break the impasse, while staffers worked into the night trading and reviewing offers. The two made progress, according to a person familiar with the negotiations who requested anonymity to discuss the talks.

“There’s still significant differences between the two sides but negotiations continue,” Reid, a Nevada Democrat, said on the Senate floor. The Senate will reconvene today at 11 a.m. Washington time and “perhaps” have further announcements then, he said. “I certainly hope so.”

Congress is working to avert more than $600 billion in tax increases and federal spending cuts, the so-called fiscal cliff, set to start taking effect tomorrow. Allowing those changes to take effect would cause a recession in the first half of 2013, according to the Congressional Budget Office.

U.S. stock futures rose, paring the decline indicated for the Standard & Poor’s 500 Index at the open today. S&P 500 futures expiring in March gained 0.2 percent to 1,386.5 at 7:20 a.m. in New York. The contract implies the benchmark gauge for American equities will open about 0.7 percent lower.

Tax cuts

Tax cuts first enacted during George W. Bush’s presidency are scheduled to expire tonight. President Barack Obama and other Democrats have sought to extend the reductions for married couples’ income up to $250,000 a year while letting tax rates rise for income above that amount. Republicans oppose tax rate increases for any income level.

“The sticking point appears to be a willingness or interest or frankly, the courage to close the deal,” McConnell said on the Senate floor. “I’m willing to get this done, but I need a dance partner.”

Illinois Senator Dick Durbin, the second-ranking Democrat, said unresolved issues include the income threshold at which tax rates would rise, expiring estate tax levels and how to prevent an expansion of the alternative-minimum tax. Democrats, who represent many of the high-tax states where the AMT has the biggest bite, want to permanently limit its reach.

“The AMT is the big question mark here,” he said. “Is it going to be a permanent fix to AMT, which costs $800 billion, or a shorter fix to AMT? This thing haunts us,”

Capital Gains

Durbin also said there is a debate over raising the rate for capital gains and dividends from 15 percent to 20 percent. The issue is at what income level the rate would jump to the higher percentage, he said.

Lawmakers haven’t said whether any deal would include provisions to halt a cut in Medicare payments to doctors.

Durbin told reporters yesterday that Republicans had offered to let taxes expire on household income over $500,000. Democrats countered with a $450,000 threshold.

“People are coming around to about a $500,000 threshold,” Senator Kay Bailey Hutchison, a Texas Republican, told reporters.

On the estate tax, Republicans are still asking for 35 percent taxes on estates of $5.12 million. Democrats want a 45 percent tax rate on estates of $3.5 million. The Republican plan would continue current policies; several Democratic senators prefer that approach.

Biden and McConnell “continued their discussion late into the evening and will continue to work toward a solution,” McConnell spokesman Don Stewart said today. The vice president led talks in 2011 over raising the federal debt ceiling.

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