UPDATE 5-Washington stirs for 'fiscal cliff' talks as Obama heads home

Richard Cowan and Mark Felsenthal
Reuters Middle East

* House Speaker urges Democrat-controlled Senate to act

* President Obama due back Thursday morning to revive talks

* Treasury takes step to avoid possible default on debt

WASHINGTON/HONOLULU, Dec 26 (Reuters) - Efforts to prevent

the U.S. economy from going over a "fiscal cliff" stirred back

to life on Wednesday with less than a week to go before

potentially disastrous tax hikes and spending cuts kick in at

the New Year.

In a sign that there may be a way through deadlock in

Congress, Republican House of Representatives Speaker John

Boehner urged the Democrat-controlled Senate to act to pull back

from the cliff and offered to at least consider any bill the

upper chamber produced.

President Barack Obama will try to revive budget crisis

talks - which stalled last week - when he returns to Washington

on Thursday after cutting short his Christmas holiday in Hawaii.

But the White House and Republicans are still far apart, as

hopes for legislation to prevent the economy from tumbling off

the fiscal cliff switch to the Senate.

Democrats control a majority in that chamber but still need

some support from Republicans across the aisle for a likely

attempt to raise taxes on the wealthy.

A senior administration official told reporters traveling

with Obama in Hawaii that senior Republican leaders in Congress,

Senator Mitch McConnell and Boehner, should step up to head off

the looming tax and spending hit.

"It's up to the Senate Minority Leader not to block a vote,

and it's up the House Republican leader, the Speaker of the

House ... to allow a vote," the official said.

Months of congressional gridlock on how reduce the deficit

and rein in the nation's $16 trillion federal debt have begun to

affect ordinary Americans.

Shoppers might have spent less this holiday season for fear

of looming income tax increases and reports of lackluster retail

holiday sales added to the urgency for a deal. U.S. stocks fell

on Wednesday, dragged lower by shares of retail companies.


To avoid defaulting on the national debt if the budget

crisis spins out of control, the Treasury Department announced

measures essentially designed to buy time to allow Congress to

resolve its differences and raise the debt borrowing limit.

Obama flies back from Hawaii overnight and is due in the

White House on Thursday morning.

Starbucks Chief Executive Howard Schultz is urging workers

in the company's roughly 120 Washington-area coffee shops to

write "come together" on customers' cups on Thursday and Friday

to tell politicians to end the crisis.

"We're paying attention, we're greatly disappointed in

what's going on and we deserve better," Schultz told Reuters.

Boehner and his House Republican leadership team said in a

statement that "the Senate must act first."

That puts the ball in the court of the Democrats in the

Senate, which is likely to base any legislation on a bill it

passed earlier this year to continue tax breaks for households

with incomes below $250,000.

A spokesman for Senate Majority Leader Harry Reid issued a

strongly worded statement calling on Republicans to "drop their

knee-jerk obstruction."

"The Senate bill could pass tomorrow if House Republicans

would simply let it come to the floor," the spokesman said.

A Senate bill would likely contain an extension of expiring

unemployment benefits for those who have been out of work for

extended periods.

With the 435 members scattered throughout the country

because the House is in recess, House Republican leaders

scheduled a conference call for Thursday with members t o

pos sibly dis cuss bri nging the cha mber ba ck into session to deal

with the fiscal cliff.

The budget fight is not just about taxes, however.

The country faces $109 billion in across-the-board spending

cuts starting in January unless a deal is reached to either

replace or delay them. Democrats want to switch the spending

cuts to tax increases for the most part.

House Republicans have passed a bill to stop the military

portion of the spending cuts and place the entire burden on

domestic activities, including some social safety net programs.

But the main focus is on how to stop tax hikes on Jan. 1.

"This is the (emergency) scenario that we have long believed

would rise in probability the closer we go to December 31, which

essentially calls for extending all the rates for those

individuals making under $200K and households under $250K and

does not address the debt ceiling or the deficit," analyst Chris

Krueger of Guggenheim Securities wrote in a research note.

Republican Senator Kay Bailey Hutchison of Texas, who is

retiring at year's end, told MSNBC that $250,000 "is too low of

a threshold" for raising income taxes.


She said that in conversations she has had with some Senate

Democrats, "they are saying maybe more in the $400,000 to

$500,000 category."

Obama himself recently offered to raise the threshold to

$400,000, before negotiations with Boehner broke off.

Boehner and other Republican leaders said in a statement

that if the Senate sends the House new fiscal cliff legislation,

"The House will then consider whether to accept the bills ... or

to send them back to the Senate with additional amendments.

"The House will take this action on whatever the Senate can

pass, but the Senate first must act."

But even if a handful of Senate Republicans support

Democrats on a measure to avoid the worst of the fiscal cliff,

time is short. When the Senate returns on Thursday it is due to

work on a disaster aid bill to help New York and New Jersey

recover from Superstorm Sandy and other measures.

All 191 House Democrats might have to team up with at least

26 Republicans to get a majority if the bill included tax hikes

on the wealthiest Americans, as Obama is demanding.

Some of those votes could conceivably come from among the 34

Republican members who are either retiring or were defeated in

the November elections and no longer have to worry about the

political fallout.

An alternative is for Congress to let income taxes go up on

everyone as scheduled. Then, during the first week of January,

lawmakers would strike a quick deal to reduce them except on

people in the highest brackets.

They could also pass a measure putting off the $109 billion

in automatic spending cuts that most lawmakers want to avoid.

Once the clock ticks past midnight on Dec. 31, no member of

Congress would have to vote for a tax increase on anyone - taxes

would have risen automatically - and the only votes would be to

decrease tax rates for most Americans back to their 2012 levels.

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