The finances of state governments are improving, but states face deep uncertainty in the coming fiscal year as they grapple with the new costs of Medicaid expansion and the long-term costs of state employee pensions.

According to a survey of state fiscal officials released Tuesday by the National Conference of State Legislatures, state revenue has begun to return to pre-recession levels. Thirty states ended their fiscal year with combined balances and rainy day funds of 5 percent or more of their general fund spending.

But the report notes that “the robust return of state revenue collections that typified previous recoveries remains elusive.”

States’ general fund revenue increased in fiscal year 2012 by nearly 3 percent over the prior year, while spending increased by roughly the same amount.

Fiscal officials’ estimate for FY 2013 is that state revenues will go up by 3.7 percent from FY 2012, while they forecast that spending will go up by 2.4 percent.

In most states, the fiscal year runs from July 1 to June 30 of the following calendar year.

Asked to identify the biggest challenges they will face in the coming fiscal year, officials from 22 states indicated that the expansion of the Medicaid program mandated by the Affordable Care Act or other health care costs will be their most difficult problem.

Energy producing states Wyoming and Oklahoma cited low or declining prices for natural gas, coal, and oil as big challenges, while North Dakota said the energy boom in the state is causing a need for increased state spending on infrastructure.

Missouri, Pennsylvania and Montana all cited state employee pensions as the major fiscal challenge in the year ahead, while Alabama and California both cited ballot initiatives on taxing and budgeting as the biggest fiscal tests.

In Alabama, a September ballot measure would transfer $146 million from the oil and gas trust fund into the general fund. If voters reject that ballot measure, the governor and state legislature will need to make budget cuts.

In California, Democratic Gov. Jerry Brown has proposed a sales tax increase and an income tax increase on those earning more than $250,000 a year. The Brown proposal will be put to the voters on the Nov. 6 ballot.

Asked what they see as sources of fiscal strength in the year ahead, officials in most states said revenue growth coming from higher incomes and from increased tax collections. In Pennsylvania, for example, tax revenues are expected to grow at a rate of 3.4 percent, while in Tennessee tax collections have exceeded estimates for 22 consecutive months.

In 2010 and 2011 state governments were able to keep more employees on their payrolls than they otherwise would have due to an infusion of cash from the $830 billion federal stimulus. But that money has mostly run out and, according to the Bureau of Labor Statistics, the number of state employees -- which had risen from 4.9 million in 2004 to 5.2 million in 2008 -- had fallen to just above 5 million in July.  

Mitt Romney has pledged to balance the budget by 2020, after his eight years in office, if elected. But on MSNBC's Daily Rundown, a Romney surrogate once again had a difficult time defending the candidate's lack of specifics.

Is the American economy strong enough to withstand an income tax increase starting on New Year’s Day?

The rhetorical skirmish over this question is the prelude for bargaining that’s likely to culminate after Election Day as President Barack Obama tries to persuade Congress to raise income tax rates on people with incomes over $200,000 and Republicans try to keep the current tax rates in place at least for 2013.

If the two sides don’t come to terms, income tax rates for all earners go up on New Year’s Day.

For a middle-income married couple with three children under age 17, this would mean at least a $1,500 tax increase since the child tax credit is set to shrink at year end from $1,000 per child to $500 per child.

The tax policy clash played out on NBC’s Meet the Press Sunday as Meet the Press host David Gregory played a clip of Obama saying in 2010 that “the economy remains somewhat fragile” and asked Senate Democratic Whip Dick Durbin, “If it was a bad idea to raise taxes in a down economy then, why is it a good idea to raise taxes in a down economy now?”

Durbin argued that Obama “has drawn the line in the proper way. He believes, and I agree, that the top 2 percent of wage earners in America should pay their fair share.”

He said, “Asking the top 2 percent of wage earners in America to pay their fair share of taxes is not going to kill the economy. Instead, it's going to make sure we move toward reduction of our (budget) deficit.”

The Congressional Budget Office reported last week that at this point, three-quarters of the way into the fiscal year, the budget deficit, $905 billion, is $66 billion less than the deficit incurred for the same period in the prior year. Spending is about 1 percent higher and revenues are about 5 percent higher than they were at the same point last year, the CBO said.

Making the case for the Republicans, GOP Senate Whip Sen. Jon Kyl of Arizona told Gregory, “We're not talking about giving tax cuts to anyone. All we're asking is don't raise taxes on all Americans, and especially don't raise taxes on the people who create the business. When you say that the high income earners, the top 20 percent, pay 90 percent of the taxes, what should they pay, 99 percent? These are the people who have enough money to invest in businesses and to create jobs.” The tax increase that Obama is proposing “falls directly on those job creators,” Kyl said.

The Arizona Republican predicted that his party will gain control of the Senate on Election Day.

The GOP needs a net gain of four seats to do so – a goal that seems within reach since the nonpartisan Cook Political Report says eight seats now held by Democrats are in the toss-up or likely Republican category. Three GOP-held seats are in Cook's toss-up category.

“That means that both the House and the Senate will reject these kinds of job-killing tax increases that the president is proposing,” Kyl said. “I think that will make it more difficult for the president to propose what he is doing now and go back to where he was a year and a half ago when he said it would be a blow to the economy to increase taxes on anyone. He was right then. And then we had a 3 percent GDP growth, now we're fewer than 2 percent.”

A major tax increase on upper-income people is already set to begin on New Year’s Day: the Affordable Care Act’s new Medicare tax on people with incomes over $200,000. The new tax will collect $20 billion in revenues next year, increasing to nearly $40 billion a year by 2019.

Some Democrats, such as House Ways and Means Committee member Rep. Xavier Becerra of California, see the expiring tax rates as powerful leverage for their side. Becerra has made the case for allowing the current income tax rates to expire on Dec. 31, which would mean they’d revert to the higher levels of 2000.

Becerra said in May that cumulative deficits could be reduced by $7 trillion over ten years if pre-2001 tax rates took effect in 2013.  He said Congress could “tweak” those tax increases in 2013 (when Becerra and other Democrats hope they’ll be in the congressional majority) – presumably so that they would not affect lower-income people.

The original version of this story said that the child tax credit was $1,500 per child; in fact, it is $1,000 per child.

A Meet the Press roundtable discusses the recent unemployment report and its role in American politics.

For the U.S. military and the defense industry, two critical events are looming: the November election which may give the nation a new commander in chief, and automatic spending cuts required by last year’s Budget Control Act which would slice about 5 percent from Defense Department outlays in the fiscal year which begins on Oct 1.

In an outreach to conservatives, Deputy Defense Secretary Ashton Carter went to a right-of-center think tank, The American Enterprise Institute, on Wednesday to deliver the message that the Obama administration is determined to avoid the automatic cuts which take effect in January, and is pushing ahead with a strategic pivot from Iraq and Afghanistan to the Pacific Rim.

Alex Brandon / AP

Deputy Secretary of Defense Ashton Carter said the Obama administration is determined to avoid the automatic cuts which take effect in January, and is pushing ahead with a strategic pivot from Iraq and Afghanistan to the Pacific Rim.

He also relayed that the White House is spending billions to prepare for new threats such as bio-engineered pathogens.

Carter made a point of praising the man who held his job in the Bush administration, Paul Wolfowitz, who is now a scholar at AEI, lauding him for his outreach to India while at the Defense Department and for his concern about those bio-threats.

Although Carter is not a politician, his speech – combined with the Obama administration’s cooperation with Tuesday’s New York Times story on the president's process for deciding which terrorists will be killed – seemed to have the feel of an effort to re-affirm the administration’s seriousness about defense policy.

It comes squarely in the middle of an election season in which Republican presidential contender Mitt Romney has accused Obama of being irresolute on defense.

“Despite his big talk about bolstering our military position in Asia, President Obama's actions will inevitably weaken it,” Romney said in February.

In his comments at AEI, Carter underscored warnings from Defense Secretary Leon Panetta that the automatic cuts, or sequestration in Capitol Hill jargon, would damage national defense.

“People have asked, ‘are we planning for sequestration?’ The secretary of defense has said no we’re not — maybe later in the summer” when officials being to look at options for cuts, he said. 

“Planning has certain rational tone to it, but Congress in writing the Budget Control Act did not design sequester to be rational. Sequester was supposed to be ... a trigger so irrational that the prospect of it would drive and force the leadership to do what was needed” to agree on a budget plan that could win wide support.

But perhaps that trigger wasn’t irrational enough: Last year the special congressional deficit reduction “super-committee” failed to agree on a plan to increase revenues and cut spending.

Sequester will “disrupt thousands of contracts and programs,” Carter said. And Defense Department leaders would have only limited flexibility in deciding how the cuts would be applied. “Both the size and the nature of sequester nullify strategy.”

Carter also warned that the automatic cuts, or even the impending threat of them, would hurt American companies that manufacture technology and weapons systems for the military. “It makes a managerial mess out of all the things we’ve tried so carefully to put on a steady pace.”

Carter’s warning echoed that of Lockheed Martin CEO Robert Stevens who said in March that “the aerospace and defense industry cannot wait until a lame duck session (of Congress) to deal with the consequences of sequestration. We are already taking action by not hiring and training new workers, not investing in new plants and equipment and not investing in new R&D.”

The cuts would come on top of an already scheduled ten-year $487 billion reduction in defense outlays from the levels that had been planned a year ago.

Panetta has already announced reductions in the Army and Marine Corps, going from 562,000 soldiers in the Army to 490,000 by 2017, and shrinking the Marines from 202,000 to 182,000 by 2017. Also he proposes to eliminate seven tactical Air Force squadrons and retire seven Navy cruisers, as well as other programs.

WMAQ and the Chicago Sun-Times' Carol Marin, the Chicago Tribune's Rick Pearson and the Chicago Sun-Times' Laura Washington discuss the budget battle taking place on Capitol Hill.

DES MOINES -- Presumptive Republican presidential nominee Mitt Romney returned to Iowa on Tuesday, hammering President Obama for feeding a "debt and spending inferno," and warning of the dangers of a "nightmare mortgage" of debt that could swamp generations of Americans if tough decisions can't be made to cut government spending.

"This debt is America's nightmare mortgage. It's adjustable, no-money down, and assigned to our children," Romney said. "And politicians have been trying to hide the truth about this nightmare mortgage for years -- just like liar-loans. This is not just bad economics; it is morally wrong and we must stop it."

Appearing in the Hawkeye state for the first time since the Jan. 3 caucuses -- where Romney was briefly declared the winner before revised results showed Rick Santorum had won -- Romney stood in the very same ballroom in which he held his caucus night party and used stark imagery to warn of a debt and spending crisis he claimed was sweeping across the country like a prairie fire.

"The people of Iowa and America have watched President Obama nearly four years now. Much of that time, with Congress controlled by his own party. And rather than putting out that spending fire, he’s been feeding it. He has spent more and borrowed more," Romney said. "The time has come for a president, a leader, who will lead. I will lead us out of this debt and spending inferno. We will stop borrowing unfathomable sums of money we can’t even imagine from foreign countries we’re never even going to visit. I will work with you to make sure we put out this spending and borrowing fire."

The former Massachusetts governor's speech was directed toward driving a wedge between President Obama and independent voters by labeling the president yet again as an "old liberal," to the left of more centrist "new Democrats" like former President Clinton.

"Even a former McGovern campaign worker like President Clinton was signaling to his own party that Democrats should no longer try to govern by proposing a new program for every problem. President Obama tucked away the Clinton doctrine in his large drawer of discarded ideas, along with transparency and bipartisanship," Romney said in prepared remarks. (In his actual speech, Romney inadvertently said "McCain" instead of McGovern.). "It’s enough to make you wonder if maybe it was a personal beef with the Clintons. But probably that -– it runs much deeper than that."

"What President Obama is doing is not bold; it's old. As president, I will make the federal government simpler, smaller, smarter," Romney said, summing up his arguments.

But while Romney's speech today touched on entitlement reform and his oft-repeated pledge to cut programs, it glossed over how Romney would pay for his 20 percent across-the-board tax cuts, or his plans to expand military spending without creating even more debt, upon which President Obama's campaign quickly seized.

"While President Obama has put forward a plan to reduce the national debt by more than $4 trillion over the next decade, Mitt Romney refuses to say what spending cuts or tax increases he’d make to cover the cost of giving $5 trillion in tax breaks to the wealthiest Americans," Obama campaign spokeswoman Lis Smith said in a statement. "Mitt Romney simply wants to return to the same policies that caused the crisis and weakened the middle class: budget-busting tax cuts for the wealthiest Americans and letting Wall Street write its own rules. Loading the country up with debt while giving tax breaks to the wealthy—America can’t afford Romney Economics.”

The focus on debt and spending -- not job-creating and economic growth more broadly -- was notable here in a state with an unemployment rate of 5.2 percent, nearly three percentage points better than the national average and near full employment. For Romney to return Iowa to the Republican column in November, he'll have to overcome not just an economy that has comparatively thrived in the last four years, but also a significant organizational advantage to the Obama campaign, which boasts eight offices in the state -- including one here in Des Moines in the same location Romney used as his Iowa campaign headquarters during the caucuses.

"The Romney campaign will aggressively compete across Iowa and together with the Republican Party, we will have a bigger presence in Iowa than any previous Republican candidate for President," Romney spokesperson Rick Gorka said in a statement.

Despite the apocalyptic imagery of flames and nightmares, there was some levity in Romney's speech. Employing a metaphor for the inefficiencies and cronyism he sees in Washington DC, Romney, who once said President Obama was employing a "pay phone strategy" in a "smart phone world" described an imaginary scenario in which the federal government was the sole provider of cell phones in America.

"First of all, they'd still be under review, alright, you'd be listening to hearings in Congress on cell phones. When they were finally approved, the contract to make them would go to an Obama donor.  And of course they'd come out looking about the size of a shoe, with a collapsible solar panel attached to power it," Romney joked. "And of course campaign donors would be lining up see who could get appointed to be the App-Czar, alright."

If the federal government is headed toward fiscal Armageddon at the end of this year, which side will be in a stronger bargaining position, President Barack Obama or congressional Republicans?

Related: Bill Clinton, Paul Ryan headline fiscal summit talks

Some analysts have warned that the expiration of both the current income tax rates and the lower Social Security payroll tax rate -- on top of automatic spending cuts mandated by last summer’s Budget Control Act and the government reaching its borrowing limit -- could cause a fiscal shock shortly before New Year’s Eve.

Although nothing prevents Congress from enacting new tax rates, altering spending cuts, and increasing the debt limit before voters cast their ballots on Nov. 6, the reality is that most of the tax and spending votes to be held before Election Day will be "show votes" intended to put members on the record, rather than votes on bills which have a chance of being signed into law.

Will a deal be done in the lame-duck session after the Nov. 6 election, or sometime in 2013? Or is it more realistic to say we’re simply in the midst of a series of deals, some shorter, some longer, as has been the case since Obama took office?

Jonathan Ernst / Reuters

Rep. Paul Ryan, R-Wis., participates in an onstage interview during the Peterson Foundation 2012 Fiscal Summit May 15 in Washington.

At the third annual fiscal summit sponsored by the Peter G. Peterson Foundation Tuesday, House Budget Committee chairman Paul Ryan said “in the lame-duck you’ll see something to make sure we don’t have a train wreck” -- a stopgap agreement to fend off tax increases and severe spending cuts, but not “a grand bargain that will fix everything once and for all.”

But Rep. Xavier Becerra of California indicated that at least some Democrats see the expiring tax rates as powerful leverage for their side.

Becerra made the case at the fiscal summit for just allowing the current income tax rates to expire on Dec. 31, which would mean they’d revert to the higher levels of 2000.

“We could save over $7 trillion in the deficit if we allow the law to take effect” and then Congress could “tweak” those tax increases in 2013 (when Becerra and other Democrats hope they’ll be in the majority) – presumably so that they would not affect lower-income people. Such an outcome could achieve significant revenue increases and lower budget deficits in the years ahead.

Most Americans “aren’t going to be hit as hard” by allowing the tax rates of 2000 to take effect on New Year’s Day, Becerra said, as they would be if the interest rate on student loans went up.

Brendan Hoffman / Getty Images

Tom Brokaw speaks with former President Bill Clinton at the 2012 Fiscal Summit on May 15 in Washington.

House Speaker John Boehner saw leverage differently in remarks which he made to the fiscal summit in the afternoon. He said he’d seek at least one dollar of spending reduction for every dollar increase in the debt limit. He said approaching the debt limit was “an action-forcing event” that should lead to spending cuts.

“If that means we have to do a series of stop-gap measures -- so be it,” he said, “But that’s not the ideal."

To some degree, the day on which the debt limit is reached will be up to Treasury Secretary Tim Geithner. He told the fiscal summit that the Treasury has accounting and cash management tools it has used in the past to stave off reaching the debt limit.

“Those tools will probably take us into the early part of 2013,” Geithner said.

Thus the moment at which the government reaches its borrowing limit may not be exactly the point at which the current tax rates expire on Dec. 31, 2012 and when the automatic cuts in spending take effect a couple of days later.  

It was not clear whether any these comments will reflect the reality of the closed-door negotiating positions of those who must figure out after the election what to do about expiring tax rates and the debt limit.

Boehner’s call for one-for-one spending cuts to match another debt increase prompted Rep. Chris Van Hollen, D- Md., top Democrat on the House Budget Committee, to tell the summit it was "absolutely reckless" to allow the debt limit to be reached. He dismissed Boehner's one-for-one cut spending/debt increase concept as "trying to draw lines in the sand, rather than trying to reach compromise.”

Van Hollen said, “You could envision a number of extensions” and “interim agreements” in the current tax rates or to avert automatic spending cuts -- and agreed with Ryan that the lame-duck session wasn’t the time to clinch a comprehensive tax-and-spending deal.

Despite the cloudy forecast for what might happen during a lame-duck session of Congress, there was a bipartisan agreement at the fiscal summit that the nation faces a potential debt crisis in the years ahead.

The Congressional Budget Office has already predicted that interest payments on the federal debt will exceed defense outlays by 2019.

Since 2008, the federal government has benefited from extraordinarily low interest rates which have helped lighten the burden of servicing the federal debt, which in gross terms is now equal to the gross domestic product.

Ryan warned against austerity being forced on the nation by the bond markets. “We don’t want to have a situation on our hands where the credit markets have turned on us, and then we’re doing crisis management,” Ryan said. “Then we’re doing cutting across the board, cutting retirees that have already retired ... Slowing down the economy, raising the youth unemployment rate, that’s what austerity is.”

The summit also received a similar warning from former president Bill Clinton who said that as soon as the nation’s economic growth rate picks up, “interest rates will go through the roof, the cost of financing the deficit will be staggering, and the private sector will be screaming for affordable credit.”

Clinton called for Congress to enact a deficit reduction plan immediately and design it to automatically take effect once GDP growth reaches 3 percent.  

As you’d expect from a man who has been involved in Democratic Party politics for more than 40 years, Clinton bashed Republicans for what he portrayed as unreasonable opposition to tax increases.

He slammed Richard Mourdock, who last week defeated Sen. Richard Lugar, R- Ind., in the Indiana primary, for appearing to reject compromises with Democrats.

“He said, ‘I am totally against any compromise, our world views are irreconcilable’… If that were the view, there never would have been a Constitution,” Clinton said.

A few hours later, Ryan agreed with Clinton on Mourdock’s apparent unwillingness to compromise: “I just don’t agree with that,” said Ryan when event moderator Judy Woodruff paraphrased Mourdock’s comments.

But more provocative was the critique Clinton directed at members of his own party.

Democrats can balance the federal budget better than Republicans can, he said, but Democrats will spend so much on health care for the Baby Boom generation “that we will be holding on to the past too much,” he said.

Necessary investments in the future are being squeezed out by the growth of entitlement spending, he said.

“You simply cannot spend all your money on the present and the past. We may have a better balanced budget plan than Republicans do… but it is still too heavily bogged down in health care and retirement costs for the Baby Boom generation,” he said.

Clinton also warned Democrats to not imagine that they could raise all the revenue they want exclusively from upper-income people --and not from the middle class.

Alluding to his own wealth, Clinton said, “You could tax me 100 percent and you wouldn’t balance the budget,” he said.

If middle-class wages were growing, Clinton argued, middle-class Americans would not mind an income tax increase.

The short-term importance of the budget bill which the House approved this week is that Democrats now have another vote which they can use against Republicans running in tough races this fall.

Sixteen House Republicans voted against the measure -- called the Sequester Replacement Reconciliation Act -- which would replace some of the automatic spending cuts mandated by last summer’s Deficit Control Act with reductions in spending on programs for low-income people.

Championed by Budget Committee chairman and potential GOP vice presidential candidate Paul Ryan, the bill stands no chance of becoming law but does indicate where the vast majority of House Republicans want to spend more (on the military) and spend less (on outlays for lower-income people).

From Ryan’s point of view, the bill makes sensible changes in benefit rules, such as ending the practice of sending money under the Child Tax Credit to people who are not eligible to work in the United States.

The House vote was part of the debate over “austerity” -- a term that has gained new currency this week as a Washington buzzword since voters rejected French President Nicolas Sarkozy and voters in Greece refused to back a government that is pursuing a policy of cutting public spending and selling government assets.

“Austerity” implies a government sector that’s on short rations, with programs being scrapped, and government workers being laid off.

That is not exactly what’s happening in the United States at the federal level right now.

One way to measure “austerity” or lack of it is to look at what federal spending was before the recession started at the very end of 2007.

In FY2008, which began in October of 2007, outlays were $2.98 trillion, or about 21 percent of gross domestic product. In the current fiscal year Congressional Budget Office expects that spending will be $3.6 trillion or 23.4 percent of GDP.

The CBO reported this week that federal spending for the first seven months of fiscal year 2012 “was about the same as it was during the same period last year,” accounting for shifts in the timing of certain federal payments.

So far in FY2012, the federal government has spent about 0.8 percent less than it did for the comparable period last year.

To be sure, spending in certain categories is down: Medicaid outlays fell by $26 billion, or 15 percent, because the increases in the federal government’s share of Medicaid spending – part of President Obama’s stimulus plan enacted in 2009 -- expired.

The CBO also reported that outlays for unemployment benefits dropped by more than one-fifth, compared to the same period last year, because fewer claims were filed in recent months.

Defense spending decreased by about 3 percent, compared to the same period in the prior year. But spending for Social Security and Medicare benefits were up.

As for the number of federal employees, it is hard to see austerity in the most recent available data from the Office of Personnel Management which showed 2.1 million executive branch employees as of December, an increase of nearly 3.7 percent over December of 2009 and an increase of about 13 percent over September of 2007, before the recession began.

The data from the Bureau of Labor Statistics, however, does show a reduction in the number of state and local government workers. For example, since the summer of 2008 the number of local government employees has shrunk by 3.6 percent.

“The concern about austerity is that we are still in a very, very weak economic recovery and this slashing of spending at the state level and to some extent at the federal level – we’re under a wage freeze on federal employees… that is hampering the recovery and hampering the robust creation of jobs,” said Roger Hickey, co-director of the progressive group Campaign for America's Future.

Hearkening back to his 2009 stimulus plan, which helped avert state and local government layoffs in 2009 and 2010, Obama proposed in his American Jobs Act to send $35 billion in federal funds to the states so they can hire and retain public school employees, firefighters and police officers.

He also wants to spend another $50 billion on highways, subways, railroads, and aviation.

In an election year, such spending saves the jobs of members of public employee unions who tend to be loyal Democratic allies and donors.

The debate over austerity is in large part the traditional policy struggle over what the preferred or “right” mixture of spending should be: how much should government spend on a missile defense shield for the East Coast of the United States, for instance, on which House Republicans want to spend $100 million for openers, versus medical care for poor people.

And because the Republicans control the House, they have been able to prevail in some of their battles with Obama and the Democrats over which groups should be singled out to bear the burden of less spending.

Case in point: in February as part of the deal to extend the Social Security payroll tax cut, Republicans were able to force newly hired federal employees, as of next year, to pay a higher share of their paycheck for their pensions. 

“For federal employees it feels like an attack, because no one else is being asked to do anything. When millionaires in this country, who have done very well, have not been asked to put in anything more from their pay check, but middle-class federal workers are asked to put in more from their paycheck, it feels like they are being singled out,” said Julie Tagen, the legislative director for the National Active and Retired Federal Employees Association.

Next Tuesday the focus will shift for a day to the long-term struggle over the federal debt and the entitlement programs, as former Commerce Secretary Peter Peterson holds his third annual fiscal summit, a kind of Woodstock for numbers crunchers, economists, and those who worry about the nation’s ability to pay for the benefits it has promised to future retirees.

The lineup of speakers includes Ryan, former President Bill Clinton, Sen. Rob Portman, R-Ohio, and Treasury Secretary Tim Geithner.

Hickey said Peterson “is trying to buy Democrats into an austerity focus.”

Hickey, Sen. Bernie Sanders of Vermont and other progressives will be on the sidewalk outside the summit protesting: “We will be there to say if you look at the polls, the American people are very, very worried about jobs… We seem to be stuck in a permanent level of high unemployment and these deficit proposals are threatening basics like unemployment insurance….”

He added, “The best way to address the short-term deficit is to get the economy growing in a robust way so that unemployment actually comes down instead of just being stagnant. A stimulus – an investment in growth through infrastructure and aid to the states, getting the growth rate up, – will in fact bring down the deficit.”

Obama does not use the word “stimulus” anymore and he hasn’t focused on his American Jobs Act in his campaign ads, but that stimulus proposal is essentially his antidote to austerity too.

Updated at 7:06 pm ET On the eve of the federal tax filing deadline, the Senate blocked consideration of a Democratic bill to ensure that taxpayers making over $1 million a year pay more in federal taxes.

The vote, mostly on party lines, was 51 to 45, short of the 60 votes needed to advance the bill.

The bill, sponsored by Sen. Sheldon Whitehouse, D-R.I., is a version of a proposal made last year by investor Warren Buffett.

President Barack Obama had been rallying support for the “Buffett Rule” for the past several months and especially in the past week.

The tax proposal, Obama said on Sunday, is “not an argument about redistribution” of wealth. Instead, he said, "we're making an argument about how do we grow the economy so that it's going to prosper in this competitive 21st century environment," he said. "The only way we're going to do that is if people like me, who have been incredibly blessed, are willing to give a little bit back so that the next generation coming along can succeed as well.”

Democrats have tried to use the alleged unfairness of the tax code as a campaign weapon against GOP presidential candidate Mitt Romney, who paid federal income tax of $3.2 million on income of nearly $21 million in 2011, for an effective tax rate of 15 percent. Much of Romney’s income came from capital gains on his investments. Capital gains are taxed at 15 percent, while the top marginal tax rate on earned income is 35 percent.

Carolyn Kaster / AP

President Barack Obama has been rallying support for the "Buffett Rule" for the past several months and especially in the past week.

In Monday’s vote, Whitehouse and other proponents of the higher tax rate had been expected to fall short of the 60 votes they need on the motion to move ahead on the tax proposal.

But the vote will put senators on record and create a campaign benchmark that they or their opponents can use.

Among the senators up for re-election in November whose votes strategists were watching:

• Republican Scott Brown of Massachusetts
• Democrat Jon Tester of Montana
• Republican Dean Heller of Nevada
• Democrat Bill Nelson of Florida

The Senate vote on Monday is only a prelude to a contentious debate at year’s end over what to do about the current income tax provisions which expire on Dec. 31.

According to the nonpartisan Tax Policy Center, in 2011 taxpayers in the top one percent of the income distribution paid, on average, 24 percent of their income in federal incomes taxes. Taxpayers in the middle quintile of the income distribution paid, on average, 4.1 percent of their adjusted gross income in federal income taxes.

Whitehouse said on the Senate floor Monday that his bill would “restore some fairness to our tax system” and counteract what he called the “glaring tax inequity” of taxpayers such as Buffett, most of whose income comes from investments, paying a lower effective tax rate than people who earn most or all of their income from wages or salaries.

A critic of the bill, Sen. Rob Portman, R- Ohio, told the Senate that the Whitehouse bill was “bad economics, bad fiscal policy, and... a distraction from the broader bipartisan effort underway to achieve fundamental tax reform that is necessary to unleash a true economic recovery.”

The new tax would be phased in for taxpayers with incomes between $1 million and $2 million. The Whitehouse bill would not change the existing alternative minimum tax, which serves as kind of back-up system to ensure that higher-income people with lots of tax deductions end up paying higher taxes.

The bill would raise $46.7 billion over the next ten years, according to the nonpartisan staff of the Joint Committee on Taxation, so it would in itself do little to reduce the long-term mismatch between revenues and spending.

Cumulative budget deficits over the next ten years will be about $10.7 trillion, if current income tax rates remain in effect, according to the Congressional Budget Office’s estimate. If current tax rates expire at the end of this year and revert to the higher rates that were in effect prior to 2001, then cumulative deficits over the next ten years will be about $2.8 trillion.

At a Tax Policy Center panel discussion Friday, former CBO director Douglas Holtz-Eakin, who served as an economic advisor to 2008 presidential candidate John McCain, called the Buffett proposal “an empty policy. It doesn’t create a single job or help growth. It’s less than a tenth of a penny of every dollar of the current deficit. And it adds another layer of tax administration on top of the regular tax, the alternative minimum tax, and thus goes in the wrong direction from the point of view of real tax reform.”

Also at that panel discussion, David Levine, the former chief economist for investment firm Sanford C. Bernstein & Co. and a supporter of Responsible Wealth, a group of millionaires who believe high-income Americans should pay higher taxes, said instead of the Buffet rule, he’d prefer reverting to the 39.6 percent top income rates as it was in 2001 and adding a series of higher marginal income tax rates for people with incomes over $1 million, over $5 million, and over $25 million.

Washington’s partisan divide has grown so deep that President Obama and House Budget Committee chairman Rep. Paul Ryan, R- Wisc., can’t even agree that they agree, as election-year scrimmaging is obscuring the agreement in principle between those two policy wonkish leaders on curbing the growth in entitlement spending.

The two are still far apart when it comes to the revenue side of the budget deficit equation – making any comprehensive solution impossible for now.

Ryan’s budget plan was approved by the House Thursday, with no Democrats voting for it and ten Republicans voting against it. Ryan’s plan won't be enacted by the Senate but serves as a campaign statement -- for both parties.

GOP presidential contender Mitt Romney, whom Ryan endorsed Friday, has endorsed his budget proposal and Ryan will campaign with Romney in Wisconsin Friday.

Ryan said after Thursday’s vote that his plan would “save us from a debt crisis” and in assessing the plan, the Congressional Budget Office said that by 2040 it would reduce debt held by the public to less than 40 percent of Gross Domestic Product, compared to debt of nearly 200 percent of GDP if current policies are allowed to continue.

Much of the Democrats’ rhetoric attacking the Ryan plan focused on his design to cut the growth rate of Medicare spending and his lack of detail on which tax preferences and credits he’d eliminate in order to be able to reduce income tax rates.

But before it’s forgotten in the campaign rhetoric, here’s where Obama and Ryan agree: Each would require higher-income people to pay more for Medicare benefits. Obama and Ryan choose different methods, but they agree in principle: the wealthier retirees must pay more.

Each is proposing changes in benefits for future recipients, not present ones: Obama’s proposal, detailed in his Fiscal Year 2013 budget blueprint, would take effect in 2017, right after he leaves office if he wins a second term. Ryan’s would take effect in 2023.

The Obama proposal would require upper-income people on Medicare and new beneficiaries to pay higher premiums, deductibles and co-payments than they now do and would save $33 billion over its first ten years. That amount of deficit reduction seems small, but the principle of stricter means-testing is important -- and it’s one that most liberal Democrats adamantly oppose. “This is a slippery slope… a dangerous path for us to go down,” warned Sen. Ben Cardin, D- Md., weeks ago when a House-Senate conference committee considered the Obama proposal.

Ryan’s approach would convert Medicare into a system in which future retirees would shop among private insurance plans and in which the sicker and poorer retirees would get bigger federal subsidies than the healthier and wealthier retirees.

Under the Ryan plan, Medicare spending would keep increasing, but the rate of increase would be slower than under current law.

Average Medicare spending for a 65-year old last year was $5,500. Under the most plausible Congressional Budget Office forecast, average Medicare spending for a 66-year old recipient in 2030 will be $9,600 in inflation-adjusted dollars; under Ryan’s plan it would $7,400.

While Ryan’s plan is only a proposal so far, Obama has already signed the Affordable Care Act which requires upper-income people to pay higher Medicare taxes: a tax increase of $210 billion over its first eight years, starting on Jan 1. 2013.

Medicare and Social Security are a social contract between current taxpayers and future ones: you work today, paying 5.65 percent of your income in Medicare and Social Security taxes, in the expectation that workers in 2040 will pay the taxes that will pay for your Medicare and Social Security benefits.

The social contract can be altered, as Ryan and Obama, each in their own way, are now trying to do. President Reagan and House Speaker Tip O’Neill did that in 1983 by leading Congress to raise Social Security taxes, cut benefits, and increase the age of eligibility for benefits.

Medicare involves a fiscally riskier social contract or, as Democrats call it, a “guarantee” – and one that will be harder to change than the 1983 accord. Taxpayers have pledged to pay unknown future costs of medical procedures not yet invented for people who are living longer and longer lives.

Ryan said after Thursday’s House vote that his plan has in it “the seeds of a bipartisan consensus,” adding that “there is a consensus to be had in 2013.” That seems unlikely right now, but may be turn out to be true. But the first step might be for Ryan and Obama to remind voters of the basics on which they agree.

A new estimate from congressional economists says the government will run a $1.2 trillion deficit for the budget year ending just a few weeks before Election Day. It would be the fourth straight year of trillion dollar-plus deficits.

The almost $100 billion spike from earlier projections for the fiscal 2012 deficit comes almost exclusively because Congress passed legislation recommended by President Barack Obama to renew a 2 percentage point cut in payroll taxes and jobless benefits for people languishing on unemployment rolls for more than six months.

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Last year's deficit registered $1.3 trillion.

The Congressional Budget Office report is just the latest confirmation of the government's severe fiscal problems. While the official CBO forecast predicts the deficit sliding to just 1 percent of the size of the economy within a few years, that estimate relies on revenues averaging about $500 billion a year over the coming decade — mostly from expiration of Bush-era tax cuts on income, investments, large estates and for families with children.

But Obama and Republicans alike agree on extending the bulk of the Bush-era tax cuts when they expire at the end of the year. A battle is set, however, on whether to extending income tax rate cuts on income in excess of $200,000 a year for individuals or $250,000 a year for couples.

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If the Bush tax cuts are renewed, CBO says, and if automatic spending cuts mandated by last year's budget and debt pact are waived as seems possible, annual deficits would average more than $1 trillion a year over the coming decade and would, economists says, eventually spark an economic crisis.

While the short-term deficit mess is largely a product of the recent recession and slow recovery, the long-term crisis is a result of the impact baby boomers will have on federal retirement programs and the large projected increases in health care inflation.

"The aging of the population and rising costs for health care will push spending for Social Security, Medicare, Medicaid, and other federal health care programs considerably higher," the report said. "If that rising level of spending is coupled with revenues that are held close to their average ... the resulting deficits will push federal debt to unsupportable levels."

The budget office estimated somewhat lower costs for covering the uninsured under President Barack Obama's health care overhaul law, as well as slightly fewer people gaining coverage.

Assuming the Supreme Court does not overturn the law, it would reduce the number of uninsured by 30 million in 2016, or 2 million fewer people than estimated last year. Total costs from 2012-2021 are about $50 billion lower than estimated last year. That's due to a combination of factors, including overall health care costs rising more slowly than in the recent past.

The CBO report comes as Republicans controlling the House are preparing for this year's budget debate, which is sure to spill over into the presidential campaign as the two sides quarrel over Medicare, taxes and cuts to the Pentagon budget.

The budget plans of the leading GOP presidential candidates each call for new, significantly larger tax cuts that would add even more to projected deficits, according to independent analysts.