8 things that could kill a fiscal cliff deal

November 26, 2012: 8:59 AM ET
us capitol dc
Lawmakers will probably compromise on the fiscal cliff before Christmas. But if they do, it won't come easily.
WASHINGTON (CNNMoney)

Pete Davis is president of Davis Capital Investment Ideas. He worked for Democrats and Republicans on Capitol Hill, serving as an economist for the Joint Committee on Taxation and the Senate Budget Committee.

Despite what the optimists say, it's too early to count on a fiscal cliff deal.

Senior staffers have been trying to set the broad outlines of a compromise -- dollar amounts of revenue increases and spending cuts.

They're working up options for President Obama and congressional leaders to consider when they meet for their first substantive talks.

In my experience, the first thing that happens in such a meeting, after opening statements and procedural matters, is they reject all of the options the staff prepared.

Then they start arguing among themselves. After an hour or two, they tire of that and walk out on camera and tell the world they made progress.

Their staff then goes back and works all night on new options, and they meet again, and again, and again.

Here's my short list of why the fiscal cliff won't get resolved easily.

1. President Obama insists on a tax rate increase on those earning $250,000 or more, and House Republicans balk.

2. President Obama and Democrats refuse to accept revenue increases that won't be scored by the Congressional Budget Office -- i.e. that depend upon tax reform and/or upon an assumed increase in economic growth.

3. Republicans won't accept another extension of the temporary 2% payroll tax cut for working Americans. So President Obama may insist on a Making Work Pay tax credit much like the one from the 2009 stimulus package. That credit was worth up to $400 for single workers earning less than $95,000 and up to $800 for married couples making less than $190,000.

4. House Republicans insist on entitlement cuts that Senate Democrats won't accept. Senate Democrats see Social Security as completely off the table, and Medicare cuts will be difficult to achieve because most of the easier ones were used to pay for health care reform.

5. Everyone wants to repeal the $109 billion sequester of defense and nondefense spending, but Republicans may object if it's not "paid for."

6. Democrats want bigger defense cuts than Republicans will accept.

7. Discretionary spending can be shaved a bit more, but not much more without incurring Democratic opposition.

8. Republicans may refuse to accept a debt ceiling increase that is not "paid for." A one-year hike would cost about $1.2 trillion. There's no way they could pay for that.

I'm not ruling out a deal before Christmas, particularly one that combines a very modest "down payment" with procedures to deliver tax and entitlement reform. I've always said I see about a 40% chance of such a deal by December 24.

The problem for the market will be to gauge how much deficit reduction will ultimately be delivered. I expect to be underwhelmed.

Greenspan: Government cuts key to debt fix

This all comes down to how insistent President Obama will be on raising taxes on the rich and whether he will accept a deal without a rate increase.

All of the president's statements so far have upped the ante on a tax rate increase on those earning $250,000 or more. Sure, he has caved many times before on a wide range of issues, but will he do so following an election victory and when he never has to run again?

One big final impediment will remain after a deal is announced. The House may not pass it.

In July 2011, House Speaker John Boehner thought he had agreed to a deal with Obama that his colleagues would support, but House Republicans rejected it because it included revenue increases.

Boehner was put in the embarrassing position of having to return to the bargaining table and ended up cutting a smaller, kick-the-can-down-the-road deal, that resulted in the creation of the so-called Super Committee, which failed, and the $109 billion sequester that no one wants. I'm sure he'll be a lot more careful this time around to whip his support before finally signing off on a deal.

Of course, anything the House Republican Caucus will pass is unlikely to attract more than a handful of Democratic votes, even if Obama supports it. Boehner will not get united House Republican support for any deal. He may need Democratic votes to pass it, and Nancy Pelosi is unlikely to supply them.

I still see a 60% chance that we temporarily go over the fiscal cliff. After Obama and congressional leaders exhaust themselves by trying to reach agreement but failing, they may decide to risk the fiscal cliff for a short time rather than accept a bad deal.

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