WASHINGTON — White House officials rejected House Republicans' Plan B fallback proposal to extend tax rate cuts for those making under $1 million, warning it does not go far enough and will not pass muster in the Senate.

White House press secretary Jay Carney said in a statement that the plan "doesn't ask enough of the very wealthiest in taxes" and "does little to address our fiscal challenges with zero spending cuts."

The Republican plan, which would also address the alternative minimum tax and the estate tax, would not stop the sequester - the $1.2 trillion of across-the-board spending cuts slated to take effect over 10 years beginning in January. It also would not include spending cuts to entitlement programs like Social Security and Medicare.

Carney said President Obama has put a balanced proposal on the table "that achieves significant deficit reduction and reflects real compromise by meeting the Republicans halfway on revenue and more than halfway on spending."

Obama's latest proposal includes a 28% cap on the value of itemized deductions and muni bond interest as a failsafe to ensure Congress enacts tax reform next year, a source said. Specifically, the 28% cap would take effect on January 1, 2014. It's possible that the cap would be 35% for charitable contributions, the source said.

If Congress enacted tax reform in 2013, they could repeal, amend or replace the cap, but absent any action, it would take effect.

The proposal would also reduce the amount of revenue Obama is seeking to $1.2 trillion from $1.4 trillion and limit the tax hikes to households making more than $400,000 per year rather than $250,000. Obama agreed to increase his offer for spending cuts and drop his request for an extension of the payroll tax holiday. But he still wants $80 billion in new spending for infrastructure and unemployment benefits, as well as an increase in the debt limit that will span two years.

Meanwhile, there appears to be a growing consensus around the idea of a two-step process.

"Given the time constraints a two-step process is desirable," House Minority Whip Rep. Steny Hoyer, D-Md., told reporters Tuesday.

Such a process would include a "down payment" before the end of the year with instructions for congressional committees to work out the details of tax and entitlement reform next year.

House Speaker Rep. John Boehner, R-Ohio, also indicated to reporters earlier in the day that entitlement and tax reform could be dealt with next year.

"If Congress were to do entitlement reform next year and tax reform as we envision, if there is an agreement, then issues such as Medicare eligibility would be open to debate in that context, he said.

Sources said the president is also considering proposing a two-step process with the clear intent that the 28% cap would "lock in" revenues in case reforms next year fail to produce new revenues.

Also on Tuesday, Joint Economic Committee Chairman Sen. Bob Casey, D-Pa., released a 2012 economic report that concluded there is an emerging consensus on a fiscal cliff agreement. The 25-page report is intended to provide an overview of the state of the U.S. economy this year and to assist policymakers as they deal with the fiscal cliff, Casey said.

But four Republicans — committee Vice Chairman Kevin Brady, R-Tex., Sen. Dan Coats, R-Ind., Rep. Michael Burgess, R-Tex. and Rep. Mick Mulvaney, R-S.C. — issued their own, very different views in a 14-page attachment.

Casey's report concluded, "While Congress has not yet reached an agreement to avert the fiscal cliff, there is an emerging consensus on key elements of an agreement that could earn support among Democrats and Republicans. There is growing recognition that the wealthiest Americans should help to bring down the deficit by paying taxes at higher rates. Both parties agree that triggering $1.2 trillion in automatic spending cuts would be unwise. Additionally, there is a widely-shared belief that any fiscal cliff agreement must protect middle-income Americans from tax increases and include incentives for businesses to create jobs."

Casey said, "A balanced, bipartisan agreement that includes significant spending cuts and generates new revenues can help strengthen consumer and business confidence in the immediate term while putting our fiscal house in order over the longer term."

He said the economy is in stronger shape that it was a year ago, with more Americans working and fewer unemployed.

"There are indications that housing is recovering and gross domestic product will have grown for 14 consecutive quarters at the end of this year," Casey said. "Yet, too many Americans have not felt the recovery and many families are still hurting. In the days ahead, as Congress works to reach agreement on 22 spending cuts and revenue increases, policymakers must simultaneously promote job creation, achieve meaningful deficit reduction, and protect middle-income families from tax increases."

The Republicans countered those findings, saying, "Recent gains in private sector payrolls and economic growth are unacceptably small bordering on stagnation. Acceptance of this lethargic growth in output and job growth would condemn the United States to a bleak economic future."

The Republicans called for a change, saying, "We find such a course of action unacceptable and implore the President and members of his party to abandon their ideological crusade to redefine America's greatness as rooted in government. We urge them to change course and embrace the power of liberty and the free market system as the best hope to restore rapidly prosperity and opportunity for all Americans."

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.