By Mark Felsenthal and Richard Cowan
WASHINGTON (Reuters) - A top U.S. Senate Democrat sketched out a broad-brush idea on Thursday that would give Congress six months beyond year's end to come up with a comprehensive deficit-reduction plan, potentially softening the impact of a looming "fiscal cliff."
The idea by assistant Democratic Senate leader Dick Durbin has not been developed into a formal plan, a spokesman said. Financial markets and government economists are worried that failure to compromise on tax and spending issues could bring on a recession.
The so-called fiscal cliff refers to the December 31 expiration of many tax breaks, including lower rates for all income levels that were passed during the George W. Bush administration, and deep domestic spending cuts due to kick in on January 2.
The potential jolt to the economy from the tax hikes and spending cuts has emerged as a major headache for lawmakers and policymakers. The government is also expected to hit its borrowing limit of $16.39 trillion early in 2013.
Durbin's proposal, offered during a panel discussion organized by Bloomberg news on the sidelines of the Democratic Party convention in Charlotte, North Carolina, is unlikely to be welcomed warmly by Republicans.
It would allow all the tax cuts enacted by Bush to expire, at least temporarily, as scheduled at the end of the year and would rely heavily on new tax revenues to help shrink government budget deficits.
Senate Republican leader Mitch McConnell and House of Representatives Speaker John Boehner, also a Republican, have called for a one-year extension of all Bush tax cuts to give Congress more time to work out a deficit-reduction deal.
Durbin made clear his idea would be valid only if President Barack Obama wins re-election on November 6. If Obama's Republican challenger, Mitt Romney, prevails, all bets are off, Durbin said. The Illinois senator is one of Obama's closest allies in Congress.
Durbin said lawmakers could use the time after the election to agree to the overall size and structure of a deal and then promise to fill in the details by July 2013.
Acknowledging the difficulty of quickly writing a major tax bill in the first six months of 2013, Durbin said, "It clearly is going to engage the Finance Committee and Ways and Means Committees in ways they've never been challenged before."
SENDING SIGNAL LAWMAKERS 'NOT KIDDING'
Lawmakers could agree to the broad parameters of the deal, such as reducing the overall amount of the deficit by $4 trillion to $5 trillion and a ratio of about $2 of spending cuts for every $1 in revenue increases, Durbin said during the panel discussion.
Durbin said he thought $5 trillion was "overreaching" and that $4 trillion was a "sound, solid signal that you're serious."
To signal lawmakers' intent to reach such an ambitious goal, they would decide after the election and before the beginning of the new year to cut the deficit immediately, perhaps by $40 billion to $50 billion - nearly one half of the automatic spending cuts mandated by a 2011 budget and debt limit deal.
"That says to the world, they're not just kidding, they're not just putting it off, they're doing something right now to reach that goal," he said.
The six-month process would include an agreement to raise the debt ceiling to avoid the bitter fight over increasing the nation's borrowing limit that tainted the U.S. credit reputation and slowed the economic recovery in 2011, Durbin said.
(Editing by Fred Barbash and Peter Cooney)