When Congress returns on Monday for a lame-duck session devoted to taxes and spending, the key question for lawmakers will be what to do about the expiring Bush tax cuts. But whereas when lawmakers left town in September with little common ground in sight, they will return with both sides talking compromise.
Last week President Obama first sounded a conciliatory tone in his post-election press conference at the White House, a message he reiterated over the weekend.
"I recognize that both parties are going to have to work together and compromise to get something done here. But I want to make my priorities clear from the start. One: middle class families need permanent tax relief. And two: I believe we can't afford to borrow and spend another $700 billion on permanent tax cuts for millionaires and billionaires," the president said in his weekly address.
That is how much the White House says it will cost to extend the Bush tax cuts for all Americans, not just those making under $200,000 a year as the administration would prefer.
But Republicans have held their ground, arguing against raising taxes for anyone as the country emerges from a severe recession. With Democrats now weakened by the midterms' resounding defeat that saw them lose the House altogether and six seats in the Senate, a compromise now appears likely.
In September Rep. John Boehner, the likely future Speaker of the House, proposed extending the tax cuts for the wealthiest Americans for two more years, while at the same time reducing discretionary spending to 2008 levels.
Asked on "60 Minutes" if such a deal were a possibility, the president replied, "I think that when we start getting specific like that, there's a basis for a conversation. I think that what that means is that – we can look at what the budget projections are. We can think about what the economy needs right now, given that it's still weak. And, hopefully, we can agree on a set of facts that leads to a compromise. But my number one priority coming into this is making sure that middle class families don't see their tax rates go up January 1."
The top Republican in the Senate, Mitch McConnell of Kentucky, said Sunday he sensed "some flexibility" from the White House.
"We're willing to start talking about getting an extension of some kind so that taxes don't go up on anybody," he said on "Face the Nation."
Two days earlier, in a speech at the conservative Heritage Foundation in Washington, McConnell stated, "There is no reason we can't work together to prevent a tax hike on small businesses."
The Kentucky lawmaker has introduced a bill in the Senate that would make all the Bush tax cuts permanent, an outcome that appears unlikely. But a compromise – such as extending all the tax cuts for at least two years – does appear to be in the works.
That two-year extension was the plan endorsed by another top Senate Republican earlier this week. Sen. Orrin Hatch of Utah, who is set to become the top GOP member on the Senate Finance Committee during the next Congress, said he was open to a short-term extension.
"A reasonable path forward should be on the table," Hatch told Dow Jones. "It would garner support from Democrats and Republicans alike. That path forward is an extension of all the tax relief well past the next election."
If Congress failed to take action, all Americans would see their taxes go up at the end of the year, an outcome that both parties want to avoid. While Democrats want to extend the tax cuts permanently for individuals making under $200,000 and couples making under $250,000, Republicans are adamant that all Americans avoid a tax hike.
When Congress comes back to work next week – and leaders from both parties meet with President Obama at the White House on Thursday – it will be time for Republicans and Democrats to cut a deal.