Fiscal Cliff Talks: President Obama 'Modestly Optimistic'

PHOTO: The Capitol is seen in Washington, Thursday, Nov. 29, 2012.
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With less than two days remaining for Congress to reach a budget agreement that would avoid the so-called "fiscal cliff," a senior White House official tells ABC News that President Obama is still "modestly optimistic" that a deal can be struck to prevent middle class taxes from increasing on New Year's Day.

But a resolution to the ordeal won't come tonight.

Senate Majority Leader Harry Reid adjourned his chamber just before 6 p.m., ensuring a potential deal could not be voted on before senators return to business Monday morning.

The Nevada lawmaker vowed despite the recess, the parties' leadership would continue negotiations throughout the night.

Vice President Biden has now re-emerged as a key player, back in Washington and playing "a direct role" in trying to make a deal with Senate Republicans. Biden has been tapped because of his long-standing relationship with Senate Republican Leader Mitch McConnell.

A Democratic source says that McConnell seems to be genuinely interested in getting an agreement. The news dovetails with reports that the GOP has backed off a key Social Security measure that had stalled negotiations.

According to sources, the row was sparked when the GOP offered a proposal that included a new method of calculating entitlement benefits with inflation. Called the "chained consumer price index," or Chained CPI, the strategy has been criticized by some Democrats because it would lower cost of living increases for Social Security recipients.

"We thought it was mutually understood that it was off the table for a scaled-back deal," a Democratic aide said. "It's basically a poison pill."

Obama has floated chained CPI in the past as part of a grand bargain, despite opposition from the AARP and within his own party.

Also in the Republican plan brought today: An extension of the current estate tax and no increase in the debt ceiling. Higher income earners would see their taxes increase, but at levels "well above $250,000," the sources said.

That "major setback" in the talks was evident on the floor of the Senate this afternoon.

"I'm concerned about the lack of urgency here, I think we all know we are running out of time," McConnell said, "I want everyone to know I am willing to get this done, but I need a dance partner."

McConnell, R-Ky., said he submitted the Republican's latest offer to Reid, D-Nev., at 7:10 p.m. Saturday and was willing to work through the night. Reid promised to get back to him at 10 this morning, but has yet to do so.

Why have the Democrats not come up with a counteroffer? Reid admitted it himself moments later.

"At this stage we're not able to make a counteroffer," Reid said noting that he's had numerous conversations with Obama, but the two parties are still far apart on some big issues, "I don't have a counteroffer to make. Perhaps as the day wears on I will be able to."

McConnell said he believes there is no major issue that is the sticking point but rather, "the sticking point appears to be a willingness, an interest, or frankly the courage to close the deal."

Reid said late this afternoon that the fiscal cliff negotiations were getting "real close" to falling apart completely.

"At some point in the negotiating process, it appears that there are things that stop us from moving forward," he said. "I hope we're not there but we're getting real close and that's why I still hold out hope that we can get something done. But I'm not overly optimistic but I am cautiously optimistic that we can get something done."

Reid said there were serious difference between the two sides, starting with Social Security. He said Democrats are not willing to cut Social Security benefits as part of a smaller, short-term agreement, as was proposed in the latest Republican proposal.

"We're not going to have any Social Security cuts. At this stage it just doesn't seem appropriate," he said. "We're open to discussion about entitlement reforms, but we're going to have to take a different direction. The present status will not work."

Reid said that even 36 hours before the country could go over the cliff, he remains "hopeful" but "realistic," about the prospects of reaching an agreement.

"The other side is intentionally demanding concessions they know we are not willing to make," he said.

The two parties were met separately at 3 p.m., and before going in Reid said he hoped there would be an announcement to make on a way forward afterwards. But as of this evening there was no agreement and no counterproposal.

McConnell said earlier today he placed a call to Vice President Biden to see if he could "jump start the negotiations on his side."

In an interview aired this morning -- well before the breakdown -- Obama suggested that a smaller deal remained the best hope to avoid the perilous package of spending cuts and tax increases.

On NBC's "Meet the Press" the president said if Republicans agreed to raising taxes on top income earners it should be enough to avoid the triggers that would execute the $607 billion measure. Economists agree that going over the cliff would likely put the country back in recession.

"If we have raised some revenue by the wealthy paying a little bit more, that would be sufficient to turn off what's called the sequester, these automatic spending cuts, and that also would have a better outcome for our economy long-term," he said.

Saying the "pressure is on Congress to produce," the president did not specify what income level his party would deem acceptable as the cutoff for those who would see their tax rates remain at current levels.

The president has called for expiration of the "Bush-era" tax cuts to affect household earnings over $250,000 since the campaign, but has reportedly floated a $400,000 figure in past negotiations.

House Speaker John Boehner once offered a $1 million cut-off in his failed "Plan B" proposal, which failed to garner enough support among the House Republicans.

"It's been very hard for Speaker Boehner and Republican Leader McConnell to accept the fact that taxes on the wealthiest Americans should go up a little bit as part of an overall deficit reduction package," the president said.

Domestic programs would lose $55 billion in funding should sequestration pass, including $2 billion to Medicare and unemployment benefits. The Pentagon would take a $55 billion loss as well, or 9 percent of its budget.

Repeating remarks he made Friday after a meeting with congressional leaders, Obama said that should negotiations fail he has asked Reid to introduce a stripped-down proposal to Congress for a straight up-or-down vote -- if it isn't blocked.

"If all else fails, if Republicans do in fact decide to block so that taxes on the middle class do in fact go up on Jan. 1, then we'll come back with a new Congress on Jan. 4, and the first bill that will be introduced on the floor will be to cut taxes on middle-class families," he said of the worst-case scenario. "I don't think the average person is going to say, 'Gosh, you know, that's a really partisan agenda.'"

The interview with the president was taped Saturday while Reid and McConnell scrambled to their offices for a solution behind closed doors. Press staking out Capitol Hill reported little public activity from the leaders or their surrogates. If negotiations are successful, the lawmakers could introduce a bill for vote this afternoon.

The Republican leaders immediately bit back at the president's remarks. In a written statement Boehner said casting blame was "ironic, as a recurring theme of our negotiations was his unwillingness to agree to anything that would require him to stand up to his own party. "

"In an effort to get the president to agree to cut spending -- which is the problem -- I put revenues on the table last year, and I put them on the table again last month," he wrote. "Republicans made every effort to reach the 'balanced' deficit agreement that the president promised the American people, while the president has continued to insist on a package skewed dramatically in favor of higher taxes that would destroy jobs."

McConnell's office issued this response to the NBC appearance: "While the President was taping those discordant remarks yesterday, Sen. McConnell was in the office working to bring Republicans and Democrats together on a solution. Discussions continue today."

Regardless of outcome, talk of a comprehensive budget deal is gone and any bill would likely set up a series of smaller partisan roadblocks in the weeks and months to come. For example, if any hypothetical legislation managed to dodge tax increases for the middle class it may still not address the looming debt ceiling, which Treasury can avoid using accounting tricks for approximately two months.

A small deal may also not address the estate tax, another central point of the brinkmanship. Republicans want to leave that rate -- currently 35 percent -- as-is after exempting the first $5 million in estate value. Meanwhile, Democrats have called for a 45 percent tax after a $3.5 million exemption. Should negotiations fail, it would climb to 55 percent after a $1 million exemption after the New Year.

The Associated Press contributed to this report.

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