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By Andy Sullivan
WASHINGTON (Reuters) - President Barack Obama said on Wednesday that Republicans would have to agree to raise taxes on the wealthy as the first step in a budget deal that would prevent a dysfunctional Washington from pushing the economy into recession.
In his first news conference since winning re-election last week, Obama said he would be open to considering Republican priorities like entitlement reform and a tax-code overhaul as part of a broad-based deal to get the nation's finances on a sustainable course.
But Obama said Republicans in Congress would first have to agree to his top priority in the complex negotiations aimed at preventing a $600 billion combination of tax increases and spending cuts known as the "fiscal cliff" that could halt the weak economic recovery at the beginning of next year.
"What I'm not going to do is to extend further a tax cut for folks who don't need it," Obama said, shortly before meeting with a dozen business leaders who are pushing policymakers to reach a deal.
Obama's remarks, and unyielding comments from Republican leaders earlier this week, begin a long and possibly tense period of bargaining and brinkmanship that could leave a cloud of uncertainty over the economy leading up to the Christmas holidays and beyond.
Both Republicans and Democrats want to keep low income tax rates in place for middle-income and low-income households, but Democrats say the wealthiest 2 percent should have to pay the higher rates that were in place in the 1990s.
Obama made increased taxes on the wealthy a centerpiece of his re-election campaign, and polls show public opinion is on his side. Obama is reaching beyond Washington to ramp up pressure on Republicans and has already met with labor and liberal groups to build support for his approach.
Several of the chief executives due to meet Obama on Wednesday, including General Electric Co.'s Jeff Immelt, Aetna Inc.'s Mark Bertolini, Honeywell International Inc.'s David Cote and Dow Chemical Co.'s Andrew Liveris, back an approach roughly in line with Obama's position.
Many other business leaders do not share that view. The U.S. Chamber of Commerce released a letter, signed by more than 200 business groups, calling on Obama to find budget savings by scaling back benefits rather than raising taxes.
Obama's relationship with the U.S. business community has been strained over much of his first term, and it is unclear how much support he will be able to muster from executives who in many cases backed Mitt Romney, his Republican rival in the presidential race.
But the meeting could rattle Republicans who are licking their wounds after last week's election that gave Obama another four years in office and sent more of his Democrats to the House of Representatives and Senate.
More voters would blame Republicans than Obama if the two sides failed to reach a deal to avert the "fiscal cliff," according to a Pew Research Center/Washington Post poll.
Republican leaders have indicated some willingness to compromise. While they oppose Obama's plan to raise tax rates on the wealthiest 2 percent of U.S. taxpayers, they have said they might go along with a deal that would raise additional tax revenue by limiting tax breaks for the wealthy.
Rank-and-file conservatives are less eager to reach a deal.
"We will continue to fight any member of our conference that decides that this is a good time to raise taxes," Republican Representative Raul Labrador said.
Democrats in Congress want the negotiations to concentrate heavily on tax increases rather than further spending cuts before the end of the year, an aide said, although they would be willing to consider other elements down the road.
LEGACY OF POSTPONED ACTION
If the two sides do not reach a deal by the end of the year, tax rates on income and investments will rise for all Americans and government programs from the military to education will face deep, across-the-board cuts. A broad range of business tax breaks for everything from wind power to research costs would expire as well.
That could cause the economy to shrink by 0.5 percent and push the unemployment rate up to 9.1 percent by the end of next year, according to the Congressional Budget Office. The current unemployment rate is 7.9 percent.
The deadline comes from years of dysfunction as lawmakers and presidents have postponed tough decisions on fixing the nation's finances.
Obama and Republicans could settle on a temporary deal that would give them more time to reach compromise, or agree to the outlines of a far-reaching budget plan that could boost the economy in the short term and rein in the country's growing debt burden over the coming decade.
They could also fail to reach a deal entirely and plunge the economy off the fiscal cliff.
Some Democrats have suggested that scenario could give them more leverage when income tax rates rise automatically on January 1 to levels that were in place during the 1990s. By that line of thinking, Republicans might be more willing to agree to a tax deal that would lower rates back to their current levels for the bottom 98 percent.
That idea clearly spooks corporate America, which is urging policymakers to settle the issue before the end of the year. Some business leaders say failure could prompt them to shift their investments overseas, and others say the uncertainty is already weighing on the economy as businesses sit on more than $1 trillion in cash rather than putting it to work.
Hiring may slow toward the end of the year as employers postpone major decisions until there is more clarity on the country's economic future, consulting firm Challenger, Gray & Christmas said.
U.S. stocks fell on Wednesday, erasing earlier gains, as strong earnings from technology bellwether Cisco were not enough to offset investor anxiety over the fiscal cliff and the European debt crisis.
"We are probably going to have many more days like this," said Randy Frederick, managing director of trading and derivatives at Charles Schwab's Center for Financial Research.
(Additional reporting by Richard Cowan in Washington and Angela Moon in New York; Editing by Peter Cooney)