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Senate Democrats to offer alternative to automatic spending cuts

by
The U.S. Capitol Dome is seen behind the entrance to the U.S. Senate (R) on Capitol Hill in Washington, November 9, 2012. REUTERS/Larry Down
The U.S. Capitol Dome is seen behind the entrance to the U.S. Senate (R) on Capitol Hill in Washington, November 9, 2012. REUTERS/Larry Down

WASHINGTON (Reuters) - Senate Democrats plan to unveil this week a series of targeted spending cuts and tax increases on the top-earners to replace deep, across-the-board federal spending cuts due to begin on March 1, a senior Democratic aide said on Monday.

The proposals are expected to be rejected by Republican leaders, who so far have fought any new tax increases to help bring down budget deficits that have topped $1 trillion since 2009.

As a result, the planned spending cuts known as "sequestration," which would total $1.2 trillion over a decade, are expected to trigger in about three weeks. The first round of cuts would total about $85 billion over seven months.

The Democratic aide, who asked not to be identified, said the approximately $120 billion in combined new tax revenues and spending cuts would allow for a 10-month delay - until December 31 - to the indiscriminate spending cuts contained in a budget law enacted in 2011.

The Senate Democrats' proposals are similar to ideas floated by Democrats in the House of Representatives.

The senators' plan is likely to be introduced as legislation on Thursday, and Democratic leaders could brief their rank-and-file members on Tuesday.

"They're trying to do something that's 50/50 revenues to spending cuts," said Senator Angus King, an independent from Maine, who caucuses with Democrats. "I don't think that's unreasonable."

In an interview with Reuters, King said further tax increases would be tough to swallow for Republicans, but that allowing the automatic cuts to start would devastate military readiness and "suck $85 billion out of the economy."

Among the main provisions, according to the Democratic aide, are:

* $30 billion in spending cuts over 10 years by ending some U.S. government farm payments to large agricultural producers;

* Another $30 billion in military spending cuts, which the aide did not detail;

* A "Buffett Rule" tax increase on people with the highest incomes that aims to limit the deductions they are allowed and thus set a minimum effective tax rate. Again, details were not available.

This tax rise would be separate from an income tax increase enacted on January 1 that raised rates for households with incomes above $450,000 a year.

The idea is named after billionaire Warren Buffett, who argues that his tax rate should be higher than that of his secretary.

MCCONNELL SAYS BILL 'DESIGNED TO FAIL'

In a Senate speech on Monday, Republican leader Mitch McConnell predicted Democrats would "offer some gimmicky bill designed to fail."

A second Democratic aide said on Friday other ideas being discussed were raising the low "carried interest" tax rate for investors in private equity funds, ending tax breaks for oil companies and corporate jets and imposing higher payroll taxes on certain businesses that pay taxes as individuals.

Two liberal Democratic senators, Carl Levin of Michigan and Sheldon Whitehouse of Rhode Island, on Monday introduced legislation curbing corporate tax benefits to raise at least $200 billion to cut deficits and avoid the "damaging effects" of the automatic spending cuts.

The bill would close the carried interest loophole and limit companies' ability to take tax deductions when they shut plants in the United States and move operations abroad. President Barack Obama has backed both ideas.

Republicans have not yet offered new ideas for avoiding the automatic spending cuts set to begin on March 1, which would hit military and non-military programs hard. The first $85 billion in cuts would be compressed into the period from March 1 to September 30, when Washington's fiscal year ends.

Last year, the Republican-controlled House passed a bill to replace the automatic spending cuts. Their bill would have done so by stopping all of the military reductions for this year and placing the entire burden on other domestic programs. Republicans knew that Democrats would balk.

If the automatic cuts begin on March 1, as expected, pressure could build for a way out of them by late March, when lawmakers must address another potential budget crisis: funding government operations between March 27 and September 30 or face agency shut-downs.

(Reporting By Richard Cowan, David Lawder and Kim Dixon; Editing by Mohammad Zargham)

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