Major Setback in Last-Ditch 'Fiscal Cliff' Talks

Democratic Senate Leader Harry Reid on Sunday rejected the latest offer from Republican Leader Mitch McConnell, stalling tense last minute negotiations and pushing the country that much closer to the fiscal cliff as the senators seemed unable to find a bipartisan deal before automatic tax cuts and spending hikes kick in for the new year.

A senior Democratic aide tells me that, although talks continue, the McConnell offer was "a major setback."

"We are hugely disappointed," the aide aid tells ABC News.

The McConnell offer, according to the aide, included:

- An extension of the Bush era tax cuts for taxpayers who earn "well above" the $250,000 income level that Democrats proposed - An extension of the current estate tax - A reduction in cost of living increases for Social Security recipients (" chained CPI"), which is a major sticking point for some Democrats - No increase in the debt ceiling, which would set up another tough fiscal debate early in the new year

For Democrats, the Social Security provision, which was offered by President Obama as part of a grand bargain that would have included $1.4 trillion in tax cuts and increase in the debt ceiling, is a non-starter and was never going to be part of this stop-gap deal.

"We are now further apart than we were 24 hours ago," the aide says.

The "major setback" of 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," Senate Minority Leader Mitch McConnell, R-KY., said, "I want everyone to know I am willing to get this done, but I need a dance partner."

McConnell said he submitted the Republican's latest offer to Majority Leader Reid at 7:10 p.m. last night and was willing to work through the night.

But Democrats have not made a counter-offer and Reid rejected McConnell's proposal.

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

McConnell said that 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."

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

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

The two sides will meet separately at 3 p.m. and afterwards Reid said he hopes there is an announcement to make on a way forward.

Repeating remarks he made Friday after a meeting with congressional leaders, President Obama said on Meet the Press that should negotiations fail he has asked Senate Majority Leader Harry Reid, D-Nev., 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 January 1, then we'll come back with a new Congress on January 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.'"

ABC's Sunlen Miller contributed to this report.

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