By Richard Cowan
WASHINGTON (Reuters) - The dreaded "fiscal cliff" is rapidly becoming Washington's preoccupation - similar to the budget and debt-limit fight that consumed the U.S. capital last summer.
Not a day goes by without a series of volleys from leading partisans on the subject of the steep end-of-year tax hikes and spending cuts that would go into effect if lawmakers fail to act.
In the past week, President Barack Obama, Republican presidential challenger Mitt Romney, the speaker of the House of Representatives, the Senate's two top leaders, the treasury secretary and the chairman of the House Armed Services Committee all have weighed in.
Each is fretting about the combination of events, known as the fiscal cliff, that threatens to weaken a shaky U.S. economy unless action is taken.
These include: the December 31 expiration of across-the-board income tax cuts; the January 2 start of deep, automatic spending cuts of $1.2 trillion over 10 years; the need early in 2013 to raise U.S. borrowing authority or face a debt default; and the need for Congress to fund programs beyond the September 30 end of the current fiscal year to avert government shutdowns.
The Senate is debating the tax issue this week. The House will take it up next week.
That debate is shaping up along familiar fault lines.
Republicans want to continue income tax breaks for everyone, including the wealthiest Americans, while ending some tax credits for the poor, college students and families with children. Democrats want to continue those tax breaks, while ending tax cuts on annual income beyond $250,000.
Corporate executives, increasingly alarmed by the dispute, are getting more deeply involved. Secretary of Defense Leon Panetta met with a group of defense industry executives on Monday to hear their concerns.
There is much talk of backroom negotiations.
"If you listen carefully in private, behind the scenes in the Senate and in the House, with a lot of support from people in the business community, they're looking ... at the tough things you have to look at when you figure out" how to avoid the cliff, U.S. Treasury Secretary Timothy Geithner said on PBS's "Charlie Rose" show on Monday. "And that's very good."
Publicly, the various combatants in what may become a titanic political struggle are posturing and staking out positions, with no sign of decisions being made until after the November 6 presidential and congressional elections.
That may be because nothing has happened to change the political calculus and give one side or the other a reason to move toward compromise. The presidential race remains tight. The economy has not taken off. Surveys of U.S. public opinion show only modest awareness of the cliff or its elements.
When coupled with the slowly unfolding economic crisis in Europe, the uncertainty over America's budget and tax policies is keeping policymakers in world capitals, not to mention businesses, on edge for fear that decisions in Washington could push the U.S. economy back into recession.
"Everything depends on the outcome of the election," Republican Senator Patrick Toomey told reporters.
'UNDER THE BUS'
Toomey, one of 12 lawmakers who last November failed to reach a "grand bargain" on deficit-reduction, also said he is continuing to fine-tune a tax reform plan that he wants to have ready in case an end-of-year opportunity to offer it arises.
He was in part responding to a speech last week by Democratic Senator Patty Murray. She promised that "if we can't get a good deal, a balanced deal that calls on the wealthy to pay their fair share, then I will absolutely continue this debate into 2013 rather than lock in a long-term deal this year that throws middle-class families under the bus."
Representative Steny Hoyer, the No. 2 House Democrat, said on Tuesday he was optimistic that a post-election, "lame-duck" session of Congress would produce a deal to avoid the fiscal cliff.
"I believe that when the challenges are the greatest and the most immediate, that it has tendency to focus attention" of lawmakers, Hoyer told reporters.
Washington politicians, meanwhile, seem content to simply debate whether there should be any tax increases on the wealthy - as Democrats want - to help share the burden of controlling budget deficits that have been topping $1 trillion annually.
Republicans oppose such tax hikes at year's end, saying that would jeopardize the economy. Instead, they want to continue the existing tax rates for another year, giving Congress time to take a look at broad tax reform in 2013. A second part of the debate next year could be how to cut the cost of federal retirement and healthcare programs for the elderly and poor.
Lawmakers reached an 11th-hour deal last August after a huge showdown, averting an historic government debt default. They agreed on nearly $1 trillion in federal spending cuts over 10 years with the promise to impose another $1.2 trillion to reduce budget deficits. The deal was coupled with an increase in the Treasury Department's borrowing authority as it had bumped up against a legal limit.
CALLING THE SHOTS
Republicans hope that they will have a Republican president and Republican-controlled Congress calling the shots in 2013. Republicans currently control the House while Obama's fellow Democrats control the Senate.
Both parties hope their arguments will carry them to victory on November 6 and thus do not see a need to cut any deals yet.
Geithner, in his interview with Charlie Rose, said the steep tax increases and spending cuts now scheduled for year's end would cause "a lot of damage" to the already-fragile economy.
Obama on Monday warned Republicans to "stop playing politics" with the U.S. military, adding that "there's no reason" the two parties cannot come together on a "balanced approach" to deficit-reduction, tax policy and military funding.
On Wednesday, the Senate is expected to take a test vote on the Democrats' plan to continue the low taxes on annual income below $250,000 first put in place under Republican former President George W. Bush, and let taxes rise on income above that level in a move they say would force the wealthiest to share the burdens of fiscal responsibility.
Republicans are expected to block the move, although the two sides have yet to agree on whether votes on alternative plans would also be allowed.
Next week, House Republicans will stage their own election-year message on tax policy with a bill that simply would extend all the current Bush-era tax cuts for another year.
"The time to act on the problems we face is right now. The fiscal cliff draws closer with each passing day," Senate Republican leader Mitch McConnell said.
The White House kept up the pressure for extending middle-class tax cuts, saying that failing to do so would cause their taxes to rise in January by $2,200 for a family of four.
The Obama administration's National Economic Council report released on Tuesday stated that Republican proposals to continue all of the Bush-era income tax cuts, even for high earners, would raise taxes on 25 million families with incomes below $250,000 by ending some targeted tax credits.
While December 31 is the big fiscal deadline facing Congress, there is another deadline - September 30 - that could be a warm-up to the fiscal cliff and test Republican's and Democrats' ability to avoid disaster.
That is when money runs out to fund the government. A deal by September 30, even a stopgap one, to avert a shutdown of federal agencies would be a test of congressional leadership just weeks before the national elections.
(Additional reporting by Donna Smith, Laura MacInnis and Thomas Ferraro; Editing by Fred Barbash and Will Dunham)