Negotiators consider grand bargain on taxes and benefits

White House and congressional negotiators have dived into a three-day marathon of talks to determine whether Democrats and Republicans can strike a grand bargain on taxes and benefit programs to avert a default on the federal debt and curb the nation’s huge deficit.

After a meeting at the White House on Thursday with the eight top congressional leaders, President Obama said the parties would reconvene Sunday and would by then know “where each other’s bottom lines are.”

At issue are hundreds of billions of dollars a year in taxes and government spending. If the largest deal under discussion is agreed to, it could reshape the government’s fiscal picture for years to come, with large political implications for both parties.

Among the proposals being discussed are a change in the way cost-of-living increases are calculated for Social Security; an increase in the payments that upper-income seniors make for Medicare; an overhaul of the corporate tax system; elimination of a variety of tax breaks that primarily benefit upper-income taxpayers; and significant cuts in the military budget, farm programs and other domestic spending.

Any one of those possibilities would face formidable political opposition, but White House aides and some congressional staff believe the ideas might fare better as a package than any would individually. Already, however, as word of some of the options spread around Washington, Obama was coming under fire from congressional Democrats and interest groups who feared he was likely to agree to too many cuts and from Republicans insisting they could not support any new tax revenues.

The talks are being pushed forward by the prospect that the federal government will soon run out of authority to borrow money. If Congress does not raise the debt ceiling by Aug. 2, Treasury Department officials say, the government would no longer be able to pay all of its bills, raising the prospect of a default for the first time in U.S. history. Obama, other officials and many experts warn that would cause economic chaos.

Congressional Republicans have insisted that in return for raising the debt ceiling, they need a deal to reduce long-term deficits, though their spending plan also requires a higher debt limit. Originally, negotiators were looking at a deal to cut deficits by about $2.5 trillion over 10 years.

But as the deadline approaches, Obama has raised the stakes. The goal he is now pushing for — as much as $4.5 trillion in deficit cuts over the coming decade — would require changes both in taxes and in the government’s basic safety-net programs.

“There’s going to be pain involved politically on all sides,” Obama told reporters after the White House meeting.

In the meeting, Obama outlined options for short-, medium- and long-term packages of deficit cuts, according to a congressional aide familiar with the talks. The smallest package, $2 trillion, would be made up mostly of spending cuts already identified in talks led last month by Vice President Joe Biden. The maximum would be a $4.5-trillion deal. Obama also said he would veto any short-term fix that would require Congress to vote on the debt ceiling again this year or next. At the meeting, no one favored the smallest option, officials said.

“There are rare opportunities to do big things, and this is an opportunity to take a real step forward on reducing the deficit,” one White House advisor said, explaining Obama’s desire for a long-term, large-scale deal. “He is concerned that if we kick the can down the road and do this three months from now, we won’t have the same opportunity.”

Politically, a large-scale agreement could benefit both Obama and House Speaker John A. Boehner (R-Ohio). Before heading to the White House, Boehner told his rank and file that there was a 50-50 chance for a big deal, according to a GOP aide familiar with the closed-door meeting.

White House advisors hope a major deficit deal would bolster Obama’s popularity among centrist voters who worry about the size of the government’s debt. Historically, voters have usually rewarded presidents for accomplishments that are perceived as big.

Boehner is under pressure from conservatives to deliver the largest possible reduction in the deficit. In addition, Republicans have been taking a political beating over their votes this spring for a proposal by House Budget Committee Chairman Paul D. Ryan (R-Wis.) to convert Medicare to a voucher system. A bipartisan deficit deal that includes Medicare cuts could weaken Democrats’ ability to use the Medicare issue in next year’s campaign.

The other parties to any deal — House Democrats and senators in both parties — may be more reluctant.

Although Republicans have a majority in the House, Boehner will need to rely on some Democratic votes because a large number of conservative Republicans are expected to vote no on any increase in the debt ceiling.

House Democrats said Thursday they were stunned that Obama might consider reductions in Social Security and Medicare benefits. Anger erupted at a morning meeting Democrats held with Minority Leader Nancy Pelosi (D-San Francisco) and Minority Whip Steny H. Hoyer (D-Md.) before the two went to the White House.

“There was a lot of angst in the room,” said a Democratic aide familiar with the meeting.

Pelosi took her concerns to the White House and will reiterate her position Friday in a one-on-one session with Obama, aides said.

White House officials sought during the day to tamp down some of furor over Social Security without actually taking the idea off the table. “We have not put restrictions on what can be brought into the room or put on the table,” spokesman Jay Carney said.

The most likely change affecting Social Security, officials said, would be to shift how the government calculates the consumer price index. Many economists from both parties have argued that the current index overcompensates people for inflation.

A different measure, known as the “chained CPI,” could save $250 billion over 10 years, budget experts say, including $112 billion in lower Social Security cost-of-living increases.

The change would also increase the number of people subject to higher Medicare premiums. That part would be delayed several years because of the way Medicare is structured.

“That’s a benefit cut too, but it’s arguably a more accurate price index,” said Jared Bernstein, Biden’s former top economic advisor. Other proposals for changing Social Security, such as an increase in the retirement age, would be much harder for Obama and other Democrats to accept, Bernstein said.

Another Medicare cut would be to increase copayments by limiting popular supplemental insurance plans, officials said.

Democrats are also angry over a plan to cut Medicaid, the joint federal-state program that insures the poor. The White House wants to shift more of the Medicaid tab to state governments, many of which already struggle with the program’s cost. Advocates worry the effort will simply lead to people going without care.

“These are the poorest, most vulnerable, sickest people we are talking about. It’s not like they have somewhere else to go,” said Rep. Henry A. Waxman (D-Beverly Hills), a leading party spokesman on health issues.

Democrats also want a guarantee that spending cuts will hit defense programs as well as domestic spending.

While Democrats railed against benefit cuts, Republicans continued to object to any tax increases. Behind the scenes, though, the negotiators were discussing wrapping an overhaul of the nation’s tax code into the deal. Doing that might allow Republicans, who want lower corporate and individual tax rates, to accept closing tax loopholes in exchange.

The White House wants to raise revenue by closing corporate loopholes and raising taxes on upper-income Americans. One option is to cap itemized deductions for top earners. Another would be to let some of the upper-income tax cuts enacted during the George W. Bush administration expire on schedule in December 2012.

Writing a tax bill in time to hit the Aug. 2 deadline is impractical. So negotiators are discussing a plan in which both sides would agree to a “commitment to tax reform.”

Democrats are wary of any proposal that includes budget cuts up front but delays tax changes until later. One possibility, officials said, would be to close some loopholes now, raising revenue at least temporarily. The revenue could then be used to offset lower tax rates next year as part of a tax-reform plan.

lisa.mascaro@latimes.com

cparsons@latimes.com

Staff writers Peter Nicholas and Noam N. Levey in Washington contributed to this report.