White House floats fiscal cliff measures

June 27, 2012, 10:12 PM UTC

FORTUNE — The White House is quietly nosing into the debate over how to manage the epic pile-up of spending cuts and tax-rate hikes set to deliver a gut-punch to the economy at the end of the year.

Their proposal, floated to Congressional Democratic leaders in private meetings last week: Delay for six months the deep cuts to defense and other domestic spending poised to kick in Jan. 1, and pay for it by only extending, for a year, the Bush tax cuts for those earning under $250,000 annually.

A vote on such a plan could force Republicans to choose between two party priorities: protecting upper-income earners and shielding the Pentagon from painful cuts. The idea — presented by Chief of Staff Jack Lew, senior advisor David Plouffe, and Rob Nabors, the administration’s top liaison to Congress — is not an approach the White House itself is ready to endorse, aides briefed on the meetings said. Rather, President Obama’s envoys offered it to top Democratic brass on Capitol Hill as a response to Republican calls for extending all the Bush tax cuts, which House GOP leaders plan to put to a vote next month.

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The political stakes are high. The real-world implications are higher. The Congressional Budget Office and other independent analysts estimate a failure to address the end-of-year mess — the so-called fiscal cliff — would shave at least four points off economic activity next year, tipping the U.S. back into recession.

The unprecedented confluence of fiscal blows runs into the trillions of dollars: on top of the expiration of the Bush tax cuts, the new year will see the start of $1.2 trillion in automatic cuts triggered by the failure of the super committee last year to reach a breakthrough deficit accord. Plus, without another patch, middle class families face a tax hike from the Alternative Minimum Tax; doctors will see a reduction in their Medicare pay, workers will lose their payroll tax cut; and the unemployed will see their emergency benefits end.

Bipartisan negotiations to stave off the crisis are already under way in the Senate. And Bloomberg reported Tuesday that leaders in both chambers are considering delaying the automatic spending cuts while extending the Bush tax cuts.

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But the backroom maneuvering by the White House, which did not respond to a request for comment, suggests the talks are entering a new phase. While the administration has made clear the spending cuts on tap through the sequester will be damaging, White House spokesman Jay Carney earlier this month said lawmakers need to use the pressure of those cuts to negotiate a better deficit reduction package. Kicking the can on the defense cuts, however, would allow the administration to avoid the ugly specter of contractors sending mass layoff notices to their employees just days before the election.

It’s not clear that Congressional Democrats are ready to rally behind the plan yet, at least in part because the party is still searching for consensus over where to set the line on taxes for high-income earners. While the White House and many on the Hill have advocated for shielding those below the $250,000-a-year mark, others — including the No. 3 Senate Democrat, New York’s Chuck Schumer — favor a $1 million threshold.