Senate negotiations to craft a bipartisan budget deal proceeded in chaotic fits and starts Sunday, raising new questions about whether Congress would be able to steer the country away from the fiscal cliff.

Senate Majority Leader Harry Reid, a Democrat, leaves negotiations at the Capitol on Sunday. Associated Press

Senate Minority Leader Mitch McConnell, a Republican, leaves the Capitol on Sunday. Bloomberg News

The center of gravity had shifted by day's end after talks between Senate Majority Leader Harry Reid (D., Nev.) and Senate Minority Leader Mitch McConnell (R., Ky.) reached an impasse.

Mr. McConnell instead struck up talks with Vice President Joe Biden, a former Senate colleague with whom he has worked on bipartisan budget deals in the past. The two men planned to talk by phone into the night, a McConnell aide said. No details of their discussions were immediately available.

The Senate had set itself a goal of hatching a deal by midafternoon Sunday, a deadline that slipped by as both sides instead bickered in public and tried to apportion blame for the continuing impasse. Mr. Reid recessed the Senate until Monday at 11 a.m.

"There is significant distance between the two sides," he said. "There is still time left to reach an agreement and we intend to continue negotiations."

With just Monday remaining before the year-end deadline, the two sides appeared to be approaching a middle ground on the central question of individual income-tax rates. President Barack Obama has called for raising taxes on family income above $250,000. In the latest round of Senate talks, Republicans proposed a $550,000 threshold, which Democrats moved to $450,000, according to Sen. Dick Durbin (D., Ill.).

The U.S. Capitol. As the fiscal-cliff deadline looms, Congress and the White House are working to put together a compromise. Agence France-Presse/Getty Images

But tensions ran high over differences on other issues. Talks almost foundered when Republicans tried to resurrect a proposal to cut spending by slowing the growth of Social Security's yearly cost-of-living adjustments, an idea opposed by many Democrats. The GOP later withdrew the idea. Also at issue is the 2013 level of the estate tax, which is a levy on larger inheritances. And Republicans are complaining that the Democratic proposals do nothing to address the deficit and may in fact add to it.

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While the parties jousted over particular elements of the deal, the disputes pointed to a more fundamental disagreement between the parties: Republicans wanted any tax increase, which they only reluctantly accepted, to go toward reducing the deficit. Democrats wanted any increased tax revenue to offset spending cuts that are scheduled to kick in as part of the fiscal cliff, and to pay for extending unemployment benefits.

In the absence of a bipartisan deal, Mr. Reid is preparing for a Monday vote on a bill to carry out Mr. Obama's backup proposal, which tackles only a few items on the legislative agenda, including extending current tax rates for income up to $250,000 for couples filing jointly. Democrats are confident they could pass the bill through the Senate. A key question is whether the House, which returned Sunday evening, would approve it if it doesn't enjoy broad bipartisan support in the Senate.


Republican Rep. Scott Rigell of Virginia joins Rolfe Winkler on The News Hub to discuss the latest on the fiscal cliff and how to fix the U.S.'s revenue problem.

Some senators seemed almost resigned to the prospects of Congress missing its deadline, on the grounds that spending cuts and tax increases that take effect Tuesday and Wednesday, the first two days of the new year, could be reversed.

"The world won't end," said Sen. Tom Harkin (D., Iowa.). "Things can be made retroactive."

Still, some remained hopeful elements of a deal were on the table and could be brought into alignment at the last minute.

"We're very close," said Sen. Barbara Mikulski (D., Md.). "It is like a kaleidoscope," meaning there are many moving parts that can look beautiful or ugly depending how they're arrayed.

As aides to Messrs. Reid and McConnell negotiated through the weekend, the focus was on a narrow bill that would likely fall far short of the lofty deficit-reduction goals congressional leaders and Mr. Obama had initially pursued.

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White House officials believe raising tax rates on income above $250,000, combined with changes in capital-gains, dividend, and estate-tax rules, would raise roughly $950 billion over 10 years. According to its own budget estimates, that would raise between $50 billion and $60 billion in new revenue in the first year, less than 10% of the U.S.'s projected budget deficit.

The other items being discussed as part of the slimmed-down package would cost the government. One would extend unemployment benefits for one year, at a cost of roughly $30 billion. Another would prevent Medicare payments to doctors from being cut, at a cost of $10 billion, according to estimates.

The most expensive item being considered as part of the package would extend a change to the alternative-minimum tax, which was designed to make sure the wealthiest didn't avoid taxes by accumulating too many deductions and credits. The AMT wasn't indexed for inflation, and Congress has repeatedly passed an annual exemption to protect middle-class families from the tax. The change being considered would prevent the tax from hitting as many as 30 million additional households, and it would reduce potential revenue by close to $100 billion.

Mr. Obama expressed the Democrats' view in an interview that aired Sunday on NBC's "Meet the Press."


Sen. Bob Corker (R., Tenn.) said it remained a problem that Democrats wanted to spend the new tax revenue that would be raised by increasing the top rates. "All the money is being spent—it's not being used for any kind of deficit reduction," he said.

That is why Republicans, in negotiations with Mr. Reid, resurrected a proposal to cut spending by slowing the growth of Social Security's cost-of-living adjustments. Mr. Obama, rare among Democrats, has shown some willingness to accept the idea, but only as part of a broader budget deal, not the kind of stopgap measure being devised in the Senate.

Mr. Reid's response was sharply opposed, and the proposal, which is known as "chained CPI," nearly brought the talks to a halt until Republicans withdrew the idea.

Sen. John McCain (R., Ariz.) said "we're closer than one would think" to a deal, but "we cannot win a PR battle where we are holding fast on tax breaks for the wealthiest people versus the chained CPI. It's not a winning hand."

Speaking from the Senate floor midday, Mr. McConnell said he had reached out to Mr. Biden, amid frustration at having received no response from to a Republican offer Saturday night. Messrs. McConnell and Biden had worked together in 2010 when they were pivotal authors of a major tax-cut deal.

"The vice president and I have worked together on solutions before, and I believe we can again," the Republican said. "I'm interested in getting a result here."

As the Senate reconvened earlier Sunday, Senate Chaplain Barry Black offered an opening prayer that spoke to an institution that has seemed increasingly incapable of making the compromise needed to avoid the fiscal cliff.

"We gather this weekend with so much work left undone," said Mr. Black. "Look with favor on our nation and save us from self inflicted wounds."

—Patrick O'Connor,
Carol E. Lee
and Corey Boles
contributed to this article.

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