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Debt ceiling: Why Sunday could be make-or-break day for 'grand bargain'

President Obama is pushing for a comprehensive deal to raise the debt ceiling and trim long-term deficits. But any big deal will require arm-twisting in Congress, and time is running out.

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“I also want to have full clarity about where House Democrats stand,” she said in a press briefing on Thursday. “We do not support cuts in benefits for Social Security and Medicare…. We are not going to balance the budget on the backs of America's seniors, women, and people with disabilities.”

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Thursday’s White House meeting was the first announced negotiating session since GOP negotiators walked out of talks led by Vice Joe President Biden on June 23 after an impasse on raising taxes. Republican leaders have said that tax increases are off the table, but there is a break in GOP ranks over whether ending tax loopholes, also known as tax spending, could be used for debt reduction.

In the latest such move, Sen. John Thune (R) of South Dakota joined Democratic Sens. Dianne Feinstein of California and Amy Klobuchar of Minnesota on Thursday in sponsoring a bipartisan deal to cut $6 billion in annual tax breaks for ethanol. The deal would run afoul of some conservative groups that want to shink the size of government, because it would not balance that move with tax cuts, meaning the money would go into federal coffers.

The deal, however, provides that some two-thirds of the savings in the current fiscal year – $1.33 billion if the credit expires on July 31 – would go to debt relief and the balance to extend tax credits for ethanol pipelines.

Democrats see unpopular tax breaks as an opening to break GOP opposition to including taxes in a debt deal. For several weeks, they have taken to the Senate floor to call on Republicans to cut other tax loopholes and use the savings to offset the deficit. These include a $2.2 billion tax break for hedge-fund managers, a $300 million tax break for corporate jet owners, and $10.5 billion in tax breaks for the oil and gas industry.

Most Republicans have signed a pledge sponsored by Americans for Tax Reform that provides that any cuts in tax breaks must be offset by other tax cuts to ensure that the outcome on balance is revenue neutral – and hence can't be used to increase the size of government.

Sen. Mike Lee (R) of Utah, a member of the Senate tea party caucus, says that he supports that principle, but sees “ways of raising revenue without increasing taxes.” These include closing loopholes so Congress can lower marginal corporate tax rates, stimulate growth, and, eventually increase government revenue.

But the offsets don't necessarily need ot come at the same time as the cuts in tax breaks.

It’s a hot topic for GOP leaders responsible for negotiating a final deal.

“We all understand it’s a tough spot for [Speaker Boehner] to be in,” says Senator Alexander. "Republicans control the House, but we have a Democratic president and a Democratic Senate, so any agreement he makes is not going to be something we are entirely happy with.”

“The debt is an economic catastrophe. I hope they swing for the fences and get a result. It has to be as close to Republican principles as possible for me to support it,” he adds.

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