By Michael Pearson and Chelsea J. Carter
(CNN) — A possible deal to avert the midnight deadline for the “fiscal cliff” of automatic tax increases and spending cuts began to take shape on Monday, including an agreement to raise the income tax rate on top earners to what it was during President Bill Clinton’s last term in office, according to sources close to the process.
But one leading Senate Democrat warned the deal could run into trouble — not only from House Republicans who have long opposed any tax increase, but also from liberals in the Senate who oppose allowing more high-income households to escape a tax increase.
“No deal is better than a bad deal, and this looks like a very bad deal the way this is shaping up,” Sen. Tom Harkin, D-Iowa, said.
President Barack Obama is expected to discuss the issue in public remarks at 1:30 p.m. at the White House.
The proposal under discussion calls for rolling back tax rates on the highest-income earners to Clinton-era levels, increasing the estate tax rate, extending unemployment benefits and potentially putting off the $110 billion in automatic spending cuts called for in the legislation that created the cliff, according to sources close to the process.
The two sides are closer to an agreement than they were on Sunday, the sources told CNN. But as the Senate opened for business Monday morning, Senate Majority Leader Harry Reid said negotiators remained apart on key issues.
“There are still some issues that need to be resolved before we can bring legislation to the floor,” the Nevada Democrat said.
Even if a deal is reached, it remains to be seen how the GOP-controlled House, which earlier refused to back a $1 million threshold for higher taxes, would respond to any deal.
The proposed agreement would raise rates on top earners to Clinton-era levels, which topped out at 39.6% in 2000 before falling to the current 35% under tax cuts championed by President George W. Bush. It was unclear if the proposal would adjust the tax rates for inflation, but sources said it would spare 98% of Americans from any tax increase.
Just who would pay higher taxes remained a moving target Monday.
Sen. Dick Durbin, D-Illinois, said Republicans have now offered a $450,000 income threshold for individuals and $550,000 for couples. Democrats countered with $360,000 for individuals and $450,000 for couples, he said.
However, a source told CNN that the agreement currently under discussion would impose the top tax bracket on individual incomes above $400,000 and household incomes above $450,000.
Obama and his Democratic allies waded into the debate about the fiscal cliff seeking tax increases on individuals making more than $200,000 and families with incomes above $250,000. He later offered to raise the threshold to $400,000 as part of a larger deal.
Also under discussion is a proposal to delay the $110 billion in automatic cuts in domestic and military spending due over the next nine months, a draconian approach called sequester that was created by Congress to address the impact of high deficits and debt on the U.S. economy.
Republicans want a three-month delay while Democrats seek to forestall the cuts by one year, a Democratic source told CNN. Another Democratic source said the proposed three-month delay “can’t pass.”
The discussions occurred a day after negotiations hit a stumbling block over a Republican demand that a deal include changes to how Social Security benefits are adjusted for inflation.
Reid chastised Republicans for raising the Social Security issue, while Senate Minority Leader Mitch McConnell appealed to Vice President Joe Biden to help “jump-start” negotiations after complaining that he had received no response to an offer he put on the table.
“I want everyone to know I’m willing to get this done, but I need a dance partner,” said McConnell, R-Kentucky.
Reid, D-Nevada, had said earlier that McConnell had shown “absolutely good faith” in the talks, but “it’s just that we are apart on some pretty big issues.”
If nothing gets done before Monday at midnight, broad taxes hikes will kick in as the Bush-era cuts expire and the deep spending cuts will begin to take hold.
The nonpartisan Congressional Budget Office has predicted the combined effect could dampen economic growth by 0.5%, possibly tipping the U.S. economy into a recession and driving unemployment from its current 7.7% back over 9%.
Top-level sources on both sides of the negotiations said on condition of anonymity that talks are primarily in the hands of McConnell and Biden, and they are keeping Reid and House Speaker John Boehner, R-Ohio, informed.
On Sunday night, Boehner met with House GOP leaders and told them to sit tight and stick together as he awaits news on whether the Senate can strike a deal.
After the meeting, Rep. Tom Cole, R-Oklahoma, told reporters that Boehner said: “I’ve stayed out of those negotiations.”
“Every time we get involved in them, we sort of get burned, so we’re going to let the Senate work its will, see what they do and what they send us, and we’ll act accordingly,” he said.
As he headed home Sunday night, Reid was asked about progress, and he said: “Talk to Biden and McConnell.” On Monday, McConnell declined to say if he was optimistic.
Obama, meanwhile, laid the blame over the stalemate at the feet of Republicans.
“They say that the biggest priority is making sure that we deal with the deficit in a serious way. But the way they’re behaving is that their only priority is making sure that tax breaks for the wealthiest Americans are protected,” he said Sunday on NBC’s “Meet The Press.”
“That seems to be their only overriding, unifying theme.”
During the interview, Obama said he was willing to consider changing the way inflation is calculated for Social Security benefits, meaning that future Social Security recipients would receive less money over time, even though it was “highly unpopular among Democrats” and opposed by the AARP, the powerful lobby for seniors.
“In pursuit of strengthening Social Security for the long term, I’m willing to make those decisions,” Obama said.
“What I’m not willing to do is to have the entire burden of deficit reduction rest on the shoulders of seniors, making students pay higher student loan rates, ruining our capacity to invest in things like basic research that help our economy grow. Those are the things that I’m not willing to do.”
But a Democratic source, who did not want to be identified because of the closed nature of the talks, said members understand Obama proposed making inflation adjustments to Social Security benefits as an element of a larger deal that also would change how the federal debt ceiling is adjusted — an element no longer included in the plans.
Most Democrats oppose the inflation adjustment to Social Security, known as “chained CPI,” but many were wiling to go along with it as part of a larger deal, the source said.
Sen. Chuck Schumer, D-New York, told ABC’s “This Week” that he thought the chances of a short-term, last-minute deal brokered by Senate leaders were better than 50-50, while Sen. Lindsey Graham, R-South Carolina, told CNN that Obama will probably win the fiscal cliff battle, but it will do little to help the nation’s deficit problem.
“The president will get a political victory, a trophy for the president politically, but it will not change our debt situation or reduce our deficit in any meaningful way,” Graham said. “It will be a political victory that is hollow in nature when it comes to preventing our country from becoming Greece.”
Other Republicans argued Sunday that Obama’s plan hasn’t done enough to limit spending.
“The president is doing nothing about the addiction that his administration has to spending. He’s the spender in chief,” Sen. John Barrasso of Wyoming said on CNN’s “State of the Union.”
CNN’s Matt Smith, Jessica Yellin, Dana Bash, Deirdre Walsh, Lisa Desjardins, Ted Barrett and Ashley Killough contributed to this report.
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