Obama wins 'fiscal cliff' victory, but at high cost

By Kathleen Hennessey and David Lauter, Washington Bureau

Dec. 31, 2012 12 AM PT

WASHINGTON — President Obama, who campaigned on raising taxes on the wealthiest Americans, has fulfilled that promise even before his next term starts.

The announcement Monday night of Senate agreement on a compromise to avert part of the “fiscal cliff” meant that for the first time in two decades, Republicans in Congress were preparing to vote in favor of a bill that raised taxes, an extraordinary concession to the nation’s fiscal woes and the president’s reelection.

But Obama’s victory fell short of what he had campaigned for, and came at a high cost. Even if the House later Tuesday or Wednesday musters the votes to approve the bill that the Senate was to vote on in the wee hours of Tuesday morning, the terms of this compromise guarantee another pitched battle over spending and taxes within months.

Whether the agreement announced Monday evening turns out to be truly a victory for Obama or a lost opportunity, as many of his liberal critics feared, will depend heavily on how that next battle turns out.

PHOTOS: Notable moments of the 2012 presidential election

The agreement to freeze income tax rates for most Americans while allowing them to rise for the wealthiest dealt only with the most pressing elements of the fiscal storm Congress and the president created last year. A newly elected Congress will begin work in a few days and immediately will need to start negotiating yet another deal. That next fight will be aimed at further reducing the long-term deficit and raising the debt ceiling before the government runs out of money to pay its bills — a deadline that will hit sometime in late February or March.

The persistent battle over spending, which already has consumed Washington for two years, threatens to block Obama’s other major legislative priorities, including immigration reform and gun control.

Moreover, to get a deal, Obama had to accept far less new revenue than he had wanted. In his reelection campaign, Obama had called for raising taxes on income over $250,000. The compromise starts the increases at $400,000 for individuals and $450,000 for couples. Overall, the deal is projected to raise about $620 billion in new revenues over the next 10 years, almost $1 trillion less than Obama had asked for.

Without that extra revenue, White House officials have said, the nation eventually will face punishing cuts in Social Security, Medicare and other domestic programs. Concern that the deal included too little revenue led liberals in the Senate to threaten repeatedly Monday to pull the plug. Obama, they said, was giving in too much to Republican demands at the point where he had maximum leverage.

“I just think that’s grossly unfair,” Sen. Tom Harkin (D-Iowa), a liberal leader, said in a Senate speech Monday objecting to the deal. “If we’re going to have some kind of a deal, the deal must be one that really favors the middle class — the real middle class.”

Even after most Democratic senators made their peace with the deal, influential liberal groups such as MoveOn.org denounced it for providing too little and conceding too much.

White House aides disputed that argument. They pointed to Democratic priorities included in the deal — tax credits aimed at students, parents and the working poor were extended for five years, for example, and long-term unemployment benefits were extended for a year.

QUIZ: How much do you know about the fiscal cliff?

They also argued that the current deal was not the final installment on revenue. The current deal postponed, but did not eliminate, the automatic cuts in defense and domestic spending — known as the “sequester” — that Congress had put into place in 2011. Republicans don’t mind the domestic spending cuts, but bitterly object to the reductions in defense.

As the price for lifting those defense cuts, White House officials have said, the president will demand another round of revenue increases through closing tax loopholes and other measures. That would bring the overall revenue total close to what Obama had originally wanted — if he can prevail.

Obama made that point himself, in an afternoon statement that sought to reassure restive Democrats that he would not allow Republicans to push through a deal with only spending cuts.

“If Republicans think that I will finish the job of deficit reduction through spending cuts alone,” he said, “that’s not how it’s going to work.”

“Revenues have to be part of the equation in turning off the sequester, in eliminating these automatic spending cuts,” he said.

“If we’re going to be serious about deficit reduction and debt reduction, then it’s going to have to be a matter of shared sacrifice — at least as long as I’m president.”

Some Democrats argued that liberal doubters were selling Obama short.

“This president’s going to get more than one opportunity to exert his will,” said Rep. John B. Larson of Connecticut, a member of the House Democratic leadership. “If he faces such a recalcitrant Congress and they won’t act, we revisit this all over again.”

“I think the president’s still in the driver’s seat.”

Others, however, expressed doubt that Obama would be able to achieve his additional goals now that his trump card had been played. The president’s leverage in the current negotiations had been the automatic tax increase set to take effect Tuesday. If Republicans did not vote for a deal, taxes would go up for everyone, and polls indicated voters were inclined to blame them, not Obama.

The challenge of squeezing tax increases out of a Republican-led House will get harder, not easier, in the new year. Without the threat of an automatic tax increase, Obama has much less leverage, said Jared Bernstein, the former chief economist and economic advisor to Vice President Joe Biden. And Republicans will gain leverage through their threats to refuse an increase in the debt ceiling, which would cause the government to default on its bonds.

“While the White House had the leverage, it would have been very good for them to deal with the debt ceiling,” Bernstein said. “The Republicans are absolutely sharpening their knives for that next fight, which is horrific, by comparison — a much worse self-inflicted wound on the economy.”

“To be fair,” he said, “there are good things in this deal and if the president truly refuses to negotiate on the debt ceiling, it may turn out to be a pretty good deal. But if he folds, then he will have squandered his leverage.”

[email protected]

Paul West and Michael Memoli in the Washington bureau contributed to this report.