The Price of Politics (20 page)

The vice president had mischaracterized McConnell’s statement, Kyl said. It was not a wish, but a reflection of the state of their talks. I told McConnell that based on the pace and progress here, I didn’t think we could get a comprehensive deal that would justify lifting the debt ceiling through the end of 2012, Kyl said.

I did not intentionally mischaracterize Mitch McConnell’s position, Biden replied.

But Kyl’s assessment was both depressing and realistic. So they went back to a new version of the old issue—Medicare cuts, with Democrats repeating that they would go along only if there was real revenue.

Kyl, wagging his head, groused about the linkage of Medicare cuts and revenue. As Van Hollen had warned, Kyl was saying that both sides had agreed on a bunch of cuts which were now being held hostage to revenue.

As they probed into rural health care cuts, Baucus, thinking of Montana, said, “We need proportionality between urban and rural cuts.”

“Totally parochial,” Van Hollen scribbled in his notes.

• • •

“REVENUE” was the dreaded word at the top of the two typed pages in Eric Cantor’s hand when he connected by phone with the vice president the morning of Wednesday, June 22.
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It was day 11 and the group was scheduled to meet later.

“What do you need?” Cantor asked. “I know you’re going to need revenue. We’re going to need revenue neutrality.” Taxes raised in one area would have to be offset by tax reductions in another. “There are some things we all want to do that people want to get done.” Both sides wanted the extension of payroll tax relief for the next year, a tax cut that could cost between $100 and $200 billion, depending on how much the rate was reduced.

Cantor had more than once told Biden privately that he understood revenues would have to be part of a final agreement. Now he was offering a deal, but only of sorts, because there would be no revenue increase to the U.S. Treasury. He mentioned a $20 billion “guesstimate” increase in revenue from limiting the home mortgage interest deduction for some of the wealthy; eliminating the mortgage interest deduction for second homes—another guesstimate revenue increase of $20 billion; and tightening the tax treatment of retirement accounts.

Cantor’s proposed offsets for these increases were the $110 billion from payroll tax relief, and another $50 billion guesstimate from reducing employers’ contribution to the Social Security payroll tax by one percentage point.

He also proposed some $50 billion in corporate tax raisers, including the $3 billion for deductions related to corporate jets, and $20 billion in oil and gas subsidies for large companies. That money would have to be offset by an equivalent amount of corporate tax reductions.

Cantor felt he was being creative, offering proposals that would be controversial with his House Republicans.

Biden was listening. It wasn’t much, but getting the Republicans to say they would agree to revenue was progress. On the question of payroll tax cuts, the Democrats would be happy to accept revenue neutrality. It would pump money into the struggling economy in the short term, and could be recouped slowly over 10 years.

The vice president said the most the Republicans would get out of the administration would be increasing the age at which people became eligible for certain entitlement programs, limiting access to entitlement programs for higher-income beneficiaries, and a change in the way the Consumer Price Index was calculated. And to get those, he added, Republicans would have to give on the Bush tax cuts for the wealthy.

A
t 12:30 p.m., Pelosi met with Van Hollen, Hoyer and Clyburn to discuss a meeting they had scheduled with Obama for the following day.

We should focus on insisting that the president ask for $600 billion to $700 billion in revenue, Van Hollen said. He knew that would be a stretch. His goal was now between $400 billion and $500 billion but he needed to start the bidding higher because he was worried that the White House would go for much less, something in the $150 to $200 billion range, the convoluted “revenue neutral” number that Cantor had been floating. The question was: how to stiffen the administration’s spine?

Pelosi’s biggest concern was Medicare cuts—especially co-payments from beneficiaries. Half of Medicare recipients were receiving $22,000 or less in yearly Social Security benefits. How could they afford to pay more?

I agree, said Van Hollen, but if the Republicans give in any significant way on revenue, we will have to include some savings from Medicare, by both lowering payments to providers and requiring higher beneficiary co-payments, at least in limited areas.

Pelosi said House Democrats would not know the details of Biden’s talks because of the confidentiality agreement, and they would be
“swayed by perceptions and atmospherics.” If the perception was that Democrats were caving on Medicare, it would be bad. She said she would hang tough if the deal was balanced with real revenue. But she needed to prepare her caucus.

• • •

That day’s Biden meeting started a little late. After the vice president’s usual statement of the need for balance and revenue, Cantor began with a proposal he called Option Two, to be implemented after the 2012 elections. It would increase Medicare premiums for the upper-income bracket by 10 percent, saving $38 billion over 10 years.

I’m not interested in talking about Option Two, Van Hollen said, unless Republicans engage on the revenue question. He turned to Cantor. “We will address these issues with the same degree of seriousness that you discuss revenue.”

“Oh, you know,” Cantor replied, “that’s theology.”

“You’re talking your theology.”

“Well,” Cantor said, referring to Medicare, “that’s your theology.”

“We’re not going to keep going down this road, Eric,” Van Hollen said. “We will agree to these reforms, but we’re not going to keep talking about them until you talk about revenue. Just tell us which of these items you hate the least? Corporate jets?”

Cantor ignored the question but thought, Whoa! What was this new aggressiveness on the part of the Democrats? Where had it come from?

Remaining on the offensive, the Democrats moved next to the drug companies. They wanted more money in rebates for drugs purchased under Medicare.

For God’s sake, said Kyl, the current system for purchasing Medicare drugs is a model program that’s coming in under budget. More rebates would screw up the program. Don’t touch it.

Under budget because of low enrollment, Van Hollen said, and all drug prices had come down.

The Republicans swung back. What about the Medicaid provider tax?

It’s a scam, Biden agreed. The states were gaming the system, taxing doctors and hospitals so they could get federal reimbursements and then returning the money to the providers. Let’s call it like it is, and let’s just do this. For a moment, Biden sounded like a Republican. It could save $40 billion. “If we can’t do this—” the vice president said, “come on!”

Lew and Sperling said that it would force the states, which would get less money, to provide fewer services to the poor.

Yeah, Van Hollen said, it would encounter resistance from House Democrats.

We’re going to do lots of hard things, Biden said, pushing Van Hollen’s concerns aside. We might as well do this, he said. The administration would adopt the Republican view on this.

Cantor didn’t need to say a thing. This was a huge deal. Biden had caved on the provider tax, agreeing they could save $40 billion.

After that peace offering, Biden and Sperling brought up the essence of the problem: revenue. Sperling suggested limiting itemized deductions to 35 percent for the upper-income taxpayers, potentially raising $130 billion over ten years.

Cantor realized it was innovative, but he said he did not want to discuss it at this point.

The other idea was on the corporate tax side—the possibility of increasing revenue by changing the rules about how corporations’ inventories were treated for tax purposes.

None of these tax ideas are wild or over the top, Geithner said. They weren’t trying to raise revenue for the fun of it, but to reduce the deficit.

The Republicans still refused to engage.

“We may as well call it quits!” Biden finally said, pushing back his chair and starting to get up.

We should keep talking, Cantor and Kyl said.

That is my preference, Biden said, but it is hard to see us getting anywhere with this impasse. All the serious bipartisan plans, such as Simpson-Bowles, had included revenue.

Yeah, Kyl replied, and since Simpson-Bowles had about $1 trillion
in revenue and $3 trillion in cuts, they should just agree on the $3 trillion in cuts first. If there were four things being negotiated and they could agree on three, why not go ahead if the agreements on the three were serious? The fourth could be addressed later.

To his increasing annoyance, there were no takers. At one point, he turned to Sperling. “So you’re saying to me that even though there are Medicare savings that you think are reasonable—that we could do—you won’t do them unless we’re going to raise taxes on somebody?”

Sperling looked around the room for a few seconds.

“Well, yeah,” he replied. “We can’t agree to all your stuff without any of our stuff.”

Under the Kyl logic, Cantor said, he thought they were gaining ground.

No, Lew replied. “We are slipping today, clearly going backwards.” Whatever the case, he said, they would need firewalls—the agreed-upon division between domestic and Defense cuts—especially if the number on general spending cuts was low.

Kyl, who hated Defense cuts, pushed back on firewalls.

Cantor said he also opposed firewalls and wanted a relatively low number on the general cuts because he felt the serious cuts should come from entitlements like Medicare and Medicaid.

While the House and Senate Democrats might disagree, Lew said, the administration might be willing to live without firewalls if the number on general cuts was on the higher end.

After the meeting, Biden gestured to Cantor to come out to the hallway.

“What is going on?” Cantor asked, perplexed by the way the Democrats had turned up the heat. “You think these talks are kind of hitting their end?”

“Look,” Biden replied, “you’re right. There’s something going on.” He had met with McConnell several times over the course of the spring, and was trying to work something through a back channel. The word was also getting out to rank-and-file Democrats that they were cutting health care entitlements, and Van Hollen had asked for a
meeting of the concerned House Democrats and the president the next morning. But the group should keep meeting.

“Yeah,” the vice president went on, “we’ve probably got one or two left. Oh, by the way, that’s why Boehner and Obama are meeting now.”

Cantor was stunned. He had no idea that the speaker and the president were planning to hold separate talks. He needed to get back to his office to think this over. There were two ways out of the hallway where they were speaking. One led directly to a throng of waiting reporters, the other down a back staircase. Cantor and his communications director, Brad Dayspring, took the back way.

Cantor explained what he had learned. He’d been blindsided.

“I get more information out of Joe Biden than I do my speaker,” Cantor said.

He had spent five weeks in the Biden talks—on Boehner‘s direct instructions—and now the speaker was making an end run around him by negotiating secretly with the president.

Boehner had always been dismissive of the Biden group’s efforts. “I’m sorry I’m making you go sit in a room for three hours and wasting your time,” he told Cantor once. The speaker had repeated his conclusion that the talks were useless on multiple occasions. But Cantor had jumped into the process with a purpose, and he felt that he had forged a valuable connection with Biden and that the group had made real progress.

He had told Boehner all about it. They spoke every day, and Cantor had always kept him up to date. And Boehner hadn’t even mentioned that he was planning to meet with the president?

Cantor felt he had been lied to.

• • •

That day at 5 p.m., Boehner and Obama met privately at the White House.

“I came in through the South Entrance. Very unusual,” Boehner later recalled.
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“Went through the Diplomatic Receiving Room, waited for a few minutes, they took me upstairs to the residence, and we went outside on the Truman Balcony.”

They agreed to keep their discussions—even the fact that they were taking place—confidential.

I want to look at significant structural reforms to all the major entitlement programs, Boehner told the president.

You would have to give on tax increases before we consider entitlement reform, Obama replied.

You can’t have tax increases, Boehner said. But he did offer a path to increasing federal revenues: comprehensive tax reform.

“If we lower all the rates, clean out all the garbage in the tax code, you know, there could be some revenue,” Boehner said.

The speaker believed they could get additional revenue from economic growth and better tax compliance. It had been done with the 1986 Reagan tax code overhaul—the gold standard of tax reform—which reduced the number of personal income tax brackets, cut the top rate from 50 percent to 28 percent, and eliminated a host of tax deductions.