The Senate is set to vote Friday on the "cut, cap and balance" deficit reduction plan backed by tea party conservatives but dismissed by President Barack Obama.
This plan, which calls for cutting the nation's debt by about $3.7 trillion over the next 10 years, was passed by the Republican-led House of Representatives on Tuesday.
"Cut, cap and balance" is widely acknowledged to have virtually no chance of clearing the Senate or overcoming a promised presidential veto. Voting on it, however, allows Republicans to demonstrate their preference for steps favored by many in the tea party movement.
The plan includes the requirement that Congress pass a balanced budget amendment to the U.S. Constitution before agreeing to extend the federal debt ceiling.
The vote will happen some time Friday, said Senate Majority Leader Harry Reid said.
Obama was continuing Thursday to pursue a different plan that White House Press Secretary Jay Carney called the most "significant deficit reduction package possible."
The president and Vice President Joe Biden met for almost two hours Thursday with Democratic leaders from the House and Senate as sources indicated the negotiations were focusing on a deal to cut $3 trillion in federal deficits over the next 10 years that would be accompanied by a debt ceiling increase.
According to the congressional aides who spoke on condition of not being identified, the possible deal remains in limbo over a disagreement on whether to extend Bush-era tax cuts for families earning more than $250,000 a year. Nothing has been agreed to yet, they noted.
The possible deal would include spending cuts expected to total $1 trillion or more agreed to in earlier negotiations led by Biden, the sources said. It also would reform entitlement programs by changing the eligibility age for Medicare over time, and using a more restrictive inflation index for Social Security benefits, according to the sources.
On taxes, it would permanently extend the Bush tax cuts for families earning less than $250,000 while allowing the cuts to expire at the end of 2012 for those with income above that, the aides said. At the same time, the deal would include a commitment to reform the tax code next year, which is expected to lower all tax rates and eliminate loopholes and subsidies, the sources said.
However, House Speaker John Boehner, R-Ohio, wants the deal to make all of the Bush tax cuts permanent while keeping the commitment to tax reform, the sources said. Republicans oppose any tax hikes, and their resistance has been a major obstacle to any deal in the negotiations so far.
Some sources said the deal would work in two stages, with spending cuts and a debt ceiling increase occurring right away while entitlement reforms and tax reforms would occur later.
Earlier, Carney denied a report by the New York Times that Obama and Boehner were close to reaching a deal.
"There is no deal. We are not close to a deal," Carney told reporters. "There is no progress to report."
A spokesman for Boehner's office echoed Carney, denying any reportable progress. House Majority Leader Eric Cantor, R-Virginia, told reporters he was "unaware of any deal that has been struck."
Other signs pointed to possible movement in the talks. Carney signaled to reporters earlier in the week that Obama may now be willing to sign a short-term debt limit extension if Democratic and Republican leaders are close to agreement on a broader deficit reduction deal that includes both tax hikes and spending reforms.
Obama previously indicated he would veto any short-term extension.
Boehner huddled with some Republican freshmen after meeting with Obama on Wednesday night, and is set to hold meeting with the entire House GOP caucus Friday. He told reporters Thursday that while some House Republicans wouldn't compromise, he didn't believe they "would be anywhere close to the majority."
The highly contentious negotiations -- reflecting the core ideological beliefs of both parties -- have now become a race against the clock. If Congress fails to raise the $14.3 trillion limit by August 2, Americans could face rising interest rates, a declining dollar and increasingly jittery financial markets, among other problems.
The seriousness of the overall situation was reinforced last week when a major credit-rating agency, Standard and Poor's, said it was placing the U.S. sovereign rating on "CreditWatch with negative implications." Another major agency -- Moody's Investors Services -- said it would put America's bond rating on review for a possible downgrade.
"Even if Washington did raise the debt ceiling after just a few harrowing days following a default ... we envisage that the economy could fall quickly back into recession," Standard and Poor's said in a report Thursday
Lawmakers are also continuing discussions focused on the $3.7 trillion debt reduction blueprint put forward by the "Gang of Six," a group of three Democratic and three Republican senators.
Under the group's proposal, $500 billion in budget savings would be immediately imposed, with marginal income tax rates reduced and the controversial alternative minimum tax ultimately abolished.
The plan would create three tax brackets with rates from 8% to 12%, 14% to 22%, and 23% to 29% -- part of a new structure designed to generate an additional $1 trillion in revenue. It would require cost changes to Medicare's growth rate formula as well as $80 billion in Pentagon cuts.
Obama has praised the plan, calling it "broadly consistent" with his approach to debt reduction because it mixes tax changes, entitlement reforms and spending reductions.
Congressional leaders, however, have warned that there is most likely not enough time to translate the Gang of Six plan into legislation, tie it to a debt ceiling hike and pass it by August 2. In addition, the proposal has been hit with a barrage of criticism from both the right and the left.
Conservatives have complained about some of the plan's tax changes, while liberals have warned it would cut entitlement benefits too deeply.
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