Talks between Senate Minority Leader Mitch McConnell (R., Ky.) and Vice President Joe Biden continued Monday, as Washington tried to do what it has promised for months: engineer an alternative to the so-called fiscal cliff.
Getty Images Senate Minority Leader Mitch McConnell (R., Ky.), shown on Monday, was working with Vice President Joe Biden on a compromise to avert the fiscal cliff.
A White House official said Monday morning the talks made "progress overnight." A spokesman for Mr. McConnell said the two men "will continue to work toward a solution."
According to a McConnell aide, the senator's last two conversations with Mr. Biden were at 12:45 a.m. and 6:30 a.m.
On taxes, one of the thorniest issues on the table, the two sides appeared to be converging. President Barack Obama has called for raising individual income-tax rates on family income above $250,000. In the latest round of Senate talks, Republicans proposed a $550,000 threshold, which Democrats moved to $450,000, according to Sen. Dick Durbin (D., Ill.).
Looking Over the Fiscal Cliff
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Falling Over the Fiscal Cliff
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On the estate tax, Democrats are no longer insisting on an increased rate and instead have agreed to put the matter to a separate vote, which suggests current rates will likely continue. That is a concession to the GOP and a number of farm-state Democrats in the Senate. Absent action, rates on estates will jump and the threshold at which they would hit is set to fall.
Other fundamental divisions remained, including primarily a disagreement of principle between the parties: Republicans wanted any tax increase, which they only reluctantly accepted, to go toward reducing the deficit. Democrats wanted any increased tax revenue to offset spending cuts that are scheduled to kick in as part of the fiscal cliff, and to pay for extending unemployment benefits, among other items.
New Year's Eve, however, dawned with no solution to Washington's budget impasse. What happens Monday could go some way to determining the short-term fate of the U.S. economy and the reputation of the government, both of which have been tarnished by the spectacle of endless seemingly circular negotiations. In the past two weeks, at least three different sets of negotiation teams have sought a way out.
Senate Majority Leader Harry Reid (D., Nev.) said on the Senate floor Monday that discussions continue, but warned "we really are running out of time," adding "There are a number of issues on which the two sides are still apart."
The Senate had set itself a goal of hatching a deal by midafternoon Sunday, a deadline that slipped by as both sides instead bickered in public and tried to apportion blame for the continuing impasse. Late Sunday, Mr. Reid recessed the Senate until Monday, leaving the McConnell/Biden talks to take the lead.
"There is significant distance between the two sides," Mr. Reid said Sunday. "There is still time left to reach an agreement and we intend to continue negotiations."
In the absence of a bipartisan deal, Mr. Reid is preparing for a Monday vote on a bill to carry out Mr. Obama's backup proposal, which tackles only a few items on the legislative agenda, including extending current tax rates for income up to $250,000 for couples filing jointly. Democrats are confident they could pass the bill through the Senate. A key question is whether the House, which returned Sunday evening, would approve it if it doesn't enjoy broad bipartisan support in the Senate.
Some senators seemed almost resigned to the prospect of Congress missing its deadline, on the grounds that spending cuts and tax increases that take effect Tuesday and Wednesday, the first two days of the new year, could be reversed.
"The world won't end," said Sen. Tom Harkin (D., Iowa.). "Things can be made retroactive."
In a sign of opposition that could mount to any deal from liberal Democrats, Sen. Harkin took to the Senate floor to criticize reports that the compromise was taking shape in negotiations between Messrs. McConnell and Biden.
One Democratic offer on the negotiating table would extend current tax rates on income up to $450,000—a retreat from Mr. Obama's original proposal to raise taxes on income over $250,000. Democrats also were moving to compromise on the president's proposal to increase estate taxes.
"We're going to lock in forever the idea that $450,000 a year is middle class in America,'' said Mr. Harkin. "The direction they are heading in is absolutely the wrong direction for our country.''
Still, some remained hopeful elements of a deal were on the table and could be brought into alignment at the last minute.
Sen. Barbara Boxer (D., Calif.) urged colleagues not to "prejudge'' the outcome before the negotiations are complete.
"This is a compromise. We don't have a parliamentary system of government here,'' said Ms. Boxer, who like other Democrats from high-cost states, welcomes a compromise that raises the threshold on income-tax increases because $250,000 doesn't go as far in California as it does in other regions.
"I am hopeful that we will get something done,'' said Ms. Boxer. "If we do, and it is fair—fair enough—we should get our country off this cliff.''
As aides to Messrs. Reid and McConnell negotiated through the weekend, the focus was on a narrow bill that would likely fall far short of the lofty deficit-reduction goals congressional leaders and Mr. Obama had initially pursued.
White House officials believe raising tax rates on income above $250,000, combined with changes in capital-gains, dividend, and estate-tax rules, would raise roughly $950 billion over 10 years. According to its own budget estimates, that would raise between $50 billion and $60 billion in new revenue in the first year, less than 10% of the U.S.'s projected budget deficit.
The other items being discussed as part of the slimmed-down package would cost the government. One would extend unemployment benefits for one year, at a cost of roughly $30 billion. Another would prevent Medicare payments to doctors from being cut, at a cost of $10 billion, according to estimates.
The most expensive item being considered as part of the package would extend a change to the alternative-minimum tax, which was designed to make sure the wealthiest didn't avoid taxes by accumulating too many deductions and credits. The AMT wasn't indexed for inflation, and Congress has repeatedly passed an annual exemption to protect middle-class families from the tax. The change being considered would prevent the tax from hitting as many as 30 million additional households, and it would reduce potential revenue by close to $100 billion.
Mr. Obama expressed the Democrats' view in an interview that aired Sunday on NBC's "Meet the Press."
"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," Mr. Obama said.
Sen. Bob Corker (R., Tenn.) said it remained a problem that Democrats wanted to spend the new tax revenue that would be raised by increasing the top rates. "All the money is being spent—it's not being used for any kind of deficit reduction," he said.
To address that concern, Republicans, in negotiations with Mr. Reid, resurrected a proposal to cut spending by slowing the growth of Social Security's cost-of-living adjustments. Mr. Obama, rare among Democrats, has shown some willingness to accept the idea, but only as part of a broader budget deal, not the kind of stopgap measure being devised in the Senate.
Mr. Reid was sharply opposed, and the proposal, which is known as "chained CPI," nearly brought the talks to a halt until Republicans withdrew the idea.
Sen. John McCain (R., Ariz.) said "we're closer than one would think" to a deal, but "we cannot win a PR battle where we are holding fast on tax breaks for the wealthiest people versus the chained CPI. It's not a winning hand."
—Patrick O'Connor, Carol E. Lee and Corey Boles contributed to this article. 
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