Obama, Congress set for one last effort on 'fiscal cliff'










WASHINGTON/HONOLULU (Reuters) - President Barack Obama is due back in Washington early Thursday for a final effort to negotiate a deal with Congress to avert or at least postpone the "fiscal cliff" of tax increases and government spending cuts set to begin next week.

No specific bill dealing with the cliff was on the schedule of either the U.S. Senate or House of Representatives, which are expected to return on Thursday after the holiday break. In Congress, the corridors were almost empty and the doors to members' rooms were locked.

Investors are closely watching the talks, concerned that going over the cliff could throw the economy into recession. U.S. stocks slipped on Wednesday after retailers reported disappointing holiday sales as shoppers tightened belts possibly due to fiscal cliff worries.

Aides and members of Congress have said that a modest, last-minute measure to avoid the spending cuts and most of the tax hikes could pass the Democratic-controlled Senate if Republicans agree not use a procedural roadblock known as a filibuster, a commitment that Senate Republican leader Mitch McConnell has so far not made.

The legislative focus continues to shift from deficit reduction to averting the immediate shock of the December 31 cliff dive.

"This is the 'Break Glass' scenario that we have long believed would rise in probability the closer we go to December 31, which essentially calls for extending all the rates for those individuals making under $200K and households under $250K and does not address the debt ceiling or the deficit," analyst Chris Krueger of Guggenheim Securities wrote in a research note.

But to win approval in the Republican-controlled House of any bill that raises taxes on anyone, a rare bipartisan vote would be required. All 191 Democrats would have to team with up with at least 26 Republicans to get a majority if the bill included tax hikes on the wealthiest Americans, as Obama is demanding.

Some of those votes could conceivably come from among the 34 Republican members who are either retiring or were defeated in the November elections and no longer have to worry about the political fallout.

JANUARY SCRAMBLE?

In the alternative, Congress could let income taxes go up on everyone as now scheduled and then during the first week of January, scramble and get a quick deal to cut them back except for the highest brackets, along with a measure putting off the $109 billion in automatic spending cuts that most lawmakers want to avoid.

Once the clock ticks past midnight on December 31, no member of Congress would have to vote for a tax increase on anyone - taxes would have risen automatically - and the only votes would be to decrease tax rates for most Americans back to their 2012 levels.

Americans' optimism that Obama and congressional leaders will reach a budget agreement before January 1 has waned in recent days, according to a Gallup poll released on Wednesday. Fifty percent believe a deal will be reached - a drop of 7 percentage points from the previous week - and 48 percent are doubtful. The poll was taken just after talks ran into trouble last week.

Obama and congressional lawmakers left Washington on Friday for the Christmas holiday with negotiations to avert the fiscal cliff in limbo.

The president will cut short his vacation in Hawaii and leave for Washington later on Wednesday, arriving in the capital early on Thursday.

Obama is expected to turn to a trusted Democratic ally, Senate Majority Leader Harry Reid, to help craft a quick deal.

White House aides began discussing details of the year-end budget measure with Senate Democratic counterparts early this week.

Starbucks Chief Executive Howard Schultz is urging workers in the company's roughly 120 Washington-area coffee shops to write "come together" on customers' cups on Thursday and Friday to send a message to sharply divided politicians.

"We're paying attention, we're greatly disappointed in what's going on and we deserve better," Schultz told Reuters.

(Additional reporting by Thomas Ferraro and Richard Cowan in Washington and Lisa Baertlein in Los Angeles; Editing by Eric Beech)

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