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U.S. budget talks hit snag, Republican senator says

U.S. Senator Lindsey Graham (C) talks to a reporter as he arrives for a Republican Senate caucus meeting at the U.S. Capitol in Washington,
U.S. Senator Lindsey Graham (C) talks to a reporter as he arrives for a Republican Senate caucus meeting at the U.S. Capitol in Washington,

By Richard Cowan and David Lawder

WASHINGTON (Reuters) - The panel of U.S. lawmakers seeking to craft a bipartisan budget deal is deadlocked over tax revenue early in its deliberations, a Senate member said on Thursday, reinforcing fears that a December 13 deadline could pass with no agreement.

Republican Senator Lindsey Graham told Reuters the negotiations were "stuck, not irreconcilably, but stuck."

Nearly one month ago, Congress created the House of Representatives-Senate working group as part of a deal that reopened the federal government following a 16-day shutdown and raised U.S. borrowing authority to avoid a potential default.

The panel's purpose, in part, is to restore some order to the federal budget process and stop lurching from one temporary funding crisis to another, each of which carries the risk of a government shutdown.

The deadlock described by Graham would be no surprise. Because of deep differences in priorities between Republicans and Democrats, the 29-member "conference committee" started work on October 30 with low expectations.

Many Democrats and Republicans hope at least to replace or adjust the large and indiscriminate across-the-board spending cuts-known as the "sequester," which have hit federal agency budgets hard, particularly for the Defense Department.

Graham, in a brief hallway interview in the Capitol, complained that Democrats on the panel insist on replacing some of those spending cuts with new revenues in an effort to "bust" current limits on spending.

"Republicans are saying, how about some vetted entitlement reform? We're not going to replace spending cuts with revenue, so we're stuck," Graham said.

The South Carolina senator said the White House is "more open-minded" about finding some savings to "entitlement programs," which normally refers mostly to Social Security, Medicare and Medicaid retirement and healthcare programs for the elderly and disabled.

"Frankly, I think the White House is in a much more reasonable place about some small entitlement changes" to replace some of the automatic spending cuts, Graham said, adding that President Barack Obama should come forward with some proposals to advance the talks.

A Senate Democratic aide, however, said Obama has long insisted that any cuts to federal benefits be coupled with revenue increases and that Democrats have seen no sign of him backing away from that requirement.

Besides the December 13 deadline for the committee to finish its work, Congress faces a January 15 date when current funding runs out for many federal programs, as well as a February 7 deadline for again raising Treasury's borrowing authority.

WISH LIST

Democrats circulated on Thursday a list of tax breaks for the wealthy and big companies that they want to close for estimated 10-year savings of $264 billion. While some of these might not be proposed in the talks, the list makes clear that Democrats believe they can win public support by targeting tax breaks that they can portray as subsidies for the rich.

Among these are ending deductions for vacation homes, yachts and corporate jets, which they claim would save as much as $19 billion over 10 years, according to the list obtained from a Democratic aide. The list also includes ending a break that allows hedge fund manager and private equity adviser income to be taxed at the lower capital gains rate, a $17 billion savings over 10 years.

The panel should "look at those tax expenditures that largely reward American business for doing business overseas," said Senator Ron Wyden, a Democratic panel member. "That's where I'm looking first, and that's where I have seen the most opportunity for common ground."

But several Republicans expressed frustration with Democrats' insistence on higher tax revenue in negotiations to cut spending.

"They're denying the reality that they're not going to get a tax increase," said Senator Ron Johnson, a Republican on the panel.

Republican Representative Tom Price, a House member of the panel, said he did not sense the two sides were at an impasse.

"I'm cautiously optimistic," the Georgia congressman said, adding he saw potential for common ground on reforming the multi-layered U.S. tax code.

Price told Reuters in an interview the panel could set up a process for tax reform that would be carried out later by the House Ways and Means and Senate Finance committees.

"I think a process for fundamental tax reform would be extremely wise," he said. "Having specific tax reductions or increases in the budget agreement, I think is highly unlikely."

Senate Budget Committee Chairwoman Patty Murray, the panel's Democratic leader, declined to comment on the status of the talks, saying that an agenda for the next public meetings on November 13 had not yet been announced.

(Additional reporting by Caren Bohan; Editing by Fred Barbash, Jackie Frank and Andre Grenon)

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