Debt ceiling negotiators close to a deal, with IRS funding in the spotlight

WASHINGTON — The White House and congressional negotiators were closing in on a compromise agreement on Friday to raise the debt ceiling for two years, with just six days to go before the nation faces a grave threat of debt default.

Markets rose Friday morning, buoyed in part by optimism that a deal would be reached in time to meet the Treasury Department’s June 1 deadline.

Under the deal currently on the table, House Republicans would achieve at least two of their highest priorities in exchange for voting to raise the debt ceiling. Firstly, to roll back baseline federal spending in 2024 on most discretionary programs. And second, to rescind some of the $80 billion allocated for the Internal Revenue Service as part of 2022’s Inflation Reduction Act, two sources with knowledge of the talks told CNBC.

That rescinded IRS money would then be used by to cover much of the shortfall in domestic funding created by the GOP spending cuts, essentially preserving the programs while technically cutting the overall topline figure. The Pentagon and veterans health benefits would be spared from any cuts, and see their funding actually increase next year.

Details were still fluid on Friday morning, with two officials calling the IRS funding trade off “a live issue.”

Spokespeople for House Speaker Kevin McCarthy, President Joe Biden and Senate Majority Leader Chuck Schumer didn’t immediately respond to requests for comment on the emerging outlines.

But on its face, the bargain could offer both parties a win. Republicans could claim, correctly, that they had secured a cut in baseline government spending for fiscal year 2024. Democrats, likewise, could say they preserved the vast majority of domestic programs at funding levels either equal to or just below their current ones.

“We’re at a sensitive phase, with sensitive issues that remain. Those sensitive issues are the thorniest issues that we’ve been discussing,” Republican negotiator Rep. Patrick McHenry, of North Carolina, told reporters at the Capitol on Thursday. “Everybody’s trying to do a fine job of figuring out the finer details of this, but nothing’s done.”

Veteran White House negotiators and deputies for McCarthy have been working around the clock for more than a week to find a path forward through a bitterly divided Congress in time to avoid a potentially catastrophic debt default.

The urgency of the talks was underscored by an announcement late Wednesday that the Fitch credit rating agency was placing the United States’ triple-A status on “rating watch negative.”

Treasury Secretary Janet Yellen told Congress that unless the debt limit was raised or suspended by June 1, it was “highly likely” that the United States would be unable to meet some of its obligations.

Even a short-term, technical debt default for a few days could wreak havoc on the domestic economy by driving up interest rates and eroding trust in the U.S. dollar as the world’s reserve currency. Fitch, for example, has already indicated it would downgrade America’s credit rating if Congress blows past the June 1 deadline.

A prolonged default could force the government to delay payments like Social Security benefits and food assistance to low-income households, money that tens of millions of Americans rely upon to survive.

Yet if negotiators can reach a final deal Friday, there could still be time to meet the deadline, and for McCarthy to keep his promise to give House members 72 hours to read the bill before a vote.

In this scenario, a House vote to raise the debt limit could be held on Tuesday, with the Senate voting on Wednesday, officials said. The June 1 deadline is Thursday.

Republicans hold a narrow majority in the House, while Democrats have a slight edge in the Senate. So negotiators need to craft a bill that can pass both chambers.

But this does not mean negotiators need to reach an agreement that everyone will support. Democrats and Republicans acknowledged this week that any final bill is likely to lose votes from hardliners on both sides.

“I don’t think everybody is going to be happy at the end of the day,” McCarthy said Thursday in the Capitol. “That’s not how this system works.”

This is a developing story, please check back for updates.