Pelosi Says Any Debt Deal Will Have to Reduce Tax Subsidies

Nancy Pelosi
House Minority Leader Nancy Pelosi, a Democrat from California, said any deal to cut the U.S. budget deficit would have to include an end to tax credits. Photographer: Scott Eells/Bloomberg

House Minority Leader Nancy Pelosi said reductions in “tax subsidies” for companies must be part of any deal to cut the U.S. budget deficit and increase the federal debt ceiling.

Democratic President Barack Obama and Republican House Speaker John Boehner will need the support of Democrats to get an agreement through the House, Pelosi said yesterday in an interview on CNN’s “State of the Union.” Such an agreement would have to include both spending cuts and an end to tax breaks for some industries such as oil, she said.

“You can’t cut your way out of the deficit,” California Democrat Pelosi said. “You have to have revenue on the table.”

Obama stepped into the negotiations to cut at least $1 trillion from the long-term deficit and raise the nation’s $14.3 trillion debt ceiling before Aug. 2, after discussions led by Vice President Joe Biden broke down when House Majority Leader Eric Cantor, a Virginia Republican, walked out June 23, saying he wouldn’t discuss increases in revenue.

“The obstacle has come because Leader Cantor walked away from the table because he doesn’t want to deal with the special-interest tax subsidies,” Pelosi said.

Obama summoned Senate Majority Leader Harry Reid, a Nevada Democrat, and Minority Leader Mitch McConnell, a Kentucky Republican, for separate meetings at the White House today aimed at breaking the impasse.

More Taxes

“Throwing more tax revenue into the mix won’t get us the desired results,” McConnell yesterday said on ABC’s “This Week.” “And it won’t pass.”

McConnell, who declined to completely rule out ending some tax breaks to raise revenue, said Republicans are focused on cutting spending.

“We need to cut spending now, we need to cap spending in the future, and we need to save our entitlement programs,” he said.

McConnell’s words echoed the pledge being circulated to members of Congress and Republican presidential candidates by Senator Jim DeMint, a South Carolina Republican, who is seeking passage of balanced budget amendment to the U.S. constitution.

“I am convinced if we don’t have that requirement, we’re going to keep spending until our country becomes worse than Greece,” DeMint said yesterday on CNN’s “State of the Union.”

Greece’s debt reached 143 percent of its gross domestic product last year and the country received a bailout from the European Union. The country is risking defaulting on its debts if it doesn’t approve tax increases and spending cuts in coming weeks.

August Deadline

Treasury Secretary Timothy F. Geithner has said the statutory debt ceiling must be raised by Aug. 2 or the U.S. risks being unable to pay its debts.

Moody’s Investors Service said this month it will put the U.S. government’s Aaa credit rating under review for a downgrade unless there’s progress on increasing the limit by mid-July. Standard & Poor’s put the U.S. on notice in April that it risks losing its top credit rating unless policy makers agree on a plan by 2013 to reduce budget deficits and the national debt.

Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., said failing to get an agreement would put the U.S. in “the land of the unpredictable.”

“My advice is please try and get together and solve this issue in the context of a medium-term reform package,” El-Erian, whose firm runs the world’s biggest bond fund, said yesterday on CNN’s “Fareed Zakaria GPS.” “If you can’t do that and you’re going to kick the can down the road, kick the can rather than face something that could be catastrophic in terms of legal contracts being triggered.”

11th Hour

McConnell said both Democrats and Republicans would like to “finish this negotiation and finish it soon.”

“It need not go to the 11th hour,” he said.

Cantor quit the Biden-led talks after seven weeks and Arizona Senator John Kyl, the second-ranking Republican, followed within hours.

At that time, the negotiators had agreed to $1.4 trillion to $2 trillion in spending cuts, McConnell said.

The Republicans bowed out with only two meetings to go in the round of dealmaking, said South Carolina Representative James Clyburn, one of the Democrats involved in the talks. The breakdown came when group was discussing ways to raise revenue that the Republicans wouldn’t accept because they saw them as tax increases, Clyburn said on “This Week.”

“How do you call loopholes to oil companies that are making all these billions in profits tax hikes?” he said. “That is no tax hike. We call a tax hike when you raise rates.”

Spending Cuts

Republicans are pressing to cut spending on entitlement programs such as Medicare and Medicaid. Democrats proposed phasing out tax breaks for those earning more than $500,000 a year, Maryland Representative Chris Van Hollen, a Democrat participating in the talks, said on a conference call June 24.

Speaking at a political fundraiser June 23 in New York, Obama said he’s “prepared to bring down our deficit by trillions of dollars,” and that spending cuts must be “balanced” with tax increases on the wealthy.

U.S. debt may exceed the size of the nation’s economy by 2021, according to the nonpartisan Congressional Budget Office.

The handoff of negotiations to the president will force Obama to be specific about what kinds of tax increases he supports to help close the budget deficit, something Democrats have avoided amid tension in their party over raising tax rates versus closing tax loopholes for corporations.

It also increases pressure on Boehner, who would have to find enough Republican votes to pass a deal that might draw opposition within his caucus.

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