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Chances fading for a sweeping deal on spending cuts

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Prospects are dimming for a grand bargain to rein in long-term budget deficits as Democrats and Republicans resist compromise on key issues ahead of the 2012 campaign, according to congressional officials and budget experts familiar with the negotiations.

That means the standoff over raising the nation’s nearly $14.3-trillion debt limit may conclude this summer with a more limited round of spending cuts and promises of future reform, pushing off the tough choices about taxes and Medicare until after next year’s election.

Republicans, by not compromising on taxes, can continue to campaign on the no-new-taxes stance that is a cornerstone of their political strategy, while attacking Democrats and President Obama for their proposed tax increases on the wealthy.

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Democrats, whose political prospects have brightened since House Republicans proposed deep cuts in Medicare, have all but ruled out any deal that would relinquish the issue as a political weapon.

“At the end, what we’re going to see is a modest-sized budget deal — a down payment,” said Jim Kessler, a vice president at Third Way, a moderate Democratic think tank.

“The number will sound big — somewhere like $1 trillion or $1.5 trillion [in cuts],” he said. “But I think it’ll be modest and disappointing — and disappointing to voters.”

Political leaders have repeatedly said that the upcoming vote in Congress to raise the debt limit provides a pivotal moment for Obama and congressional Republicans to join together on landmark fiscal reforms, much the way the divided government crafted bipartisan deals to save Social Security in 1983 and overhaul welfare in 1996.

But achieving such a budget package would require both parties to yield on issues central to their ideology and reelection strategies. “The archetypal Republican wants to attack Democrats on taxes,” said John Feehery, a GOP strategist. “The archetypal Democrat wants to attack Republicans on Medicare.”

Democrats learned from the special election in New York’s 26th Congressional District last month that the Republican Medicare proposal provides a potent campaign force, especially with sought-after older voters.

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Democrats lost seniors by 21 percentage points in the 2010 midterm election, according to exit polls. In contrast, preelection surveys in New York’s 26th District showed Democrat Kathy Hochul handily winning seniors. Hochul scored an upset victory in the Republican-dominated district.

That leaves the White House and congressional Democrats virtually no incentive to force any of the nation’s 47 million Medicare beneficiaries to pay more for their healthcare.

“For a while, you could see some on our side flirting with that idea,” said Celinda Lake, an influential Democratic pollster who advises Democrats on Capitol Hill. “This should irrevocably demonstrate that you do not play with nitroglycerine…. If we want to get seniors, we cannot play around with cutting Medicare.”

The Republican plan would create a voucher-like system that would reduce federal spending by shifting costs to future seniors, whose annual out-of pocket healthcare costs would nearly double, according to the nonpartisan Congressional Budget Office.

Similarly, Republicans see little reason to give on taxes. With Obama proposing to return upper-income tax rates to Clinton-era levels, Republicans have secured their own weapon of choice heading into the 2012 election.

“Permanently stopping job-killing tax hikes” was a plank of Republicans’ 2010 “Pledge to America,” a campaign manifesto.

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Republicans would prefer to brand Obama as a tax-hiking Democrat than put their own proposals for new taxes on the table. With plenty of candidates in the president’s party having reservations about his tax proposals, the GOP is eager to exploit those differences.

Even more, the rightward shift of the Republican Party over the last several elections has intensified the pressure to hew to its no-new-taxes mantra. “Tea party” activists want to shrink government, not expand it.

Even the closing of tax loopholes for corporations or the wealthy is seen by strict conservatives as an unacceptable tax increase.

“I’m confident that taxes are not going to be a part of this,” said Sen. Mitch McConnell of Kentucky, the Republican leader, referring to talks underway.

The nation hit its $14.3-trillion debt limit last month, and the Treasury Department can pay its bills only through Aug. 2, when the government risks a catastrophic default if borrowing cannot continue.

Deadlocked over Medicare and taxes, the two sides appear more likely to agree to an immediate round of cuts with a promise to address tax and entitlement changes in future years.

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Negotiators behind closed doors have identified $1 trillion in agricultural subsidies, federal pensions and other programs as areas for possible reductions. The White House has also proposed squeezing savings from federal payments to Medicare providers, which would not reduce benefits to seniors.

This is a more limited agreement than what many budget hawks have called for. But, for now, it would resolve the summer’s debt debate and set the stage for a broader negotiations over Medicare and tax reform after the 2012 election.

That timeline would follow a pattern set in the 1990s, when Democrats and Republicans last reached a major compromise to control spending.

In 1995, the Clinton administration beat back an unpopular Medicare proposal by House Republicans to shift seniors into private insurance plans.

After two years of bitter, partisan battling that led to a government shutdown and helped Clinton win a second term, the administration and congressional Republicans enacted the Balanced Budget Act of 1997.

That compromise, which cut more than $100 billion from Medicare over five years while introducing optional private health plans into Medicare, is seen as one of the most substantial changes in the history of the program.

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“Medicare became a partisan football, but in the end there was a compromise based on the necessity for action,” said AARP Executive Vice President John Rother, who has been working on healthcare issues in Washington for 35 years. “Of course, that process can take several years.”

lisa.mascaro@latimes.com

noam.levey@latimes.com

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