WASHINGTON (Reuters) - President Barack Obama dangled the possibility on Tuesday of lowering tax rates in 2013 with a broad U.S. tax code revamp, but he stood firm on insisting rates for the wealthiest must rise as part of a deal to avert the "fiscal cliff," a series of budget cuts and tax increases that will begin taking effect on December 31 unless Congress acts.
Congressional Republicans, looking at yet another poll showing most Americans would blame them for going off the cliff, showed more signs of internal stress over how far to go in compromising with Obama's demands on tax rates.
Outside official Washington, concern mounted about how and when - not to mention if - the politicians might put their disagreements behind them in the short time remaining.
Worry about the fiscal cliff is hurting the economy. The manufacturing sector contracted in November and posted its weakest performance in three years, a report showed on Monday. Companies taking part in the survey said uncertainty over the negotiations in Washington was a factor.
Economists warn that unless a deal is reached, the economy could be thrown back into recession.
A bi-partisan delegation of governors met with Obama and congressional leaders and fretted about their own state budgets, roughly 30 percent derived from federal money.
Members of the governors' group, led by Democrat Jack Markell of Delaware and Republican Mary Fallin of Oklahoma, pointedly noted in comments outside the White House that they were able to work together despite party differences.
After meeting with the governors, the president pressed his agenda in an interview with Bloomberg Television. He reiterated his openness to unspecified reforms in entitlement programs such as Medicare, the government health insurance plan for seniors.
He repeated that as part of any deal, low tax rates on 98 percent of taxpayers should be extended, but that taxes on the top 2 percent should rise. "Let's let those go up," Obama said, referring to a "down payment" for future negotiations.
"And then let's set up a process with a time certain, at the end of 2013 or the fall of 2013, where we work on tax reform, we look at what loopholes and deductions both Democrats and Republicans are willing to close, and it's possible that we may be able to lower rates by broadening the base at that point."
In a written offer made Monday by House of Representatives Speaker John Boehner of Ohio and signed by the House Republican leadership, Republicans continued to reject increases in tax rates. But they said they would consider $800 billion (497 billion pounds) in revenue increases from overhauling the tax code, along with spending cuts and entitlement revisions, as part of a deficit reduction deal.
That amount, which Boehner informally accepted during previous debt-ceiling negotiations in 2011, is not nearly enough for Obama. But it is too much for U.S. Senator Jim DeMint of South Carolina and a number of other conservatives who have built their political reputation around a low-tax philosophy.
"Speaker Boehner's $800 billion tax hike will destroy American jobs and allow politicians in Washington to spend even more," DeMint said in a statement on Tuesday.
Boehner has had persistent problems keeping his party unified since dozens of Tea Party conservatives arrived after the 2010 midterm elections. While dissent from the right does not necessarily cripple Boehner in negotiations, it does not help.
Democrats use it in their public relations campaign to discredit their opponents' views as those of extremists denying tax cuts to the middle class or risking a government default for ideological purposes, as White House Press Secretary Jay Carney did Tuesday as he denounced "factions."
"It is expected that there would be some grumbling, especially among the likes of DeMint," said Helen Fessenden, an analyst at consultancy Eurasia Group, adding that it is more important for Boehner to cement the support of his key lieutenants for the offer.
"Boehner already knows how the numbers shake out. At the end of the day no matter what he does there will be 60 or 80 who defect, no matter how good a deal he can get for them."
Republicans have 241 House members to 192 for the Democrats.
DISCORD COULD BE TROUBLE
Boehner was struggling to keep order among anti-tax Tea Party activists on one extreme and moderates more tolerant of new revenues on the other.
In the House, two first-term Republican Tea Party stalwarts - Tim Huelskamp of Kansas and Justin Amash of Michigan - were removed by party leadership from the powerful Budget Committee in what Huelskamp called "a vindictive move."
The Republican leadership offered no immediate explanation for the unusual removal.
On the moderate wing, a handful of House Republicans - such as Mike Simpson of Idaho and Steve King of Iowa - have said that tax increases on the wealthiest may be tolerable under certain conditions.
Public opinion has held steady since early November, with about half of Americans expecting Obama and the Republicans will be unable to avert a plunge off the cliff, said the Pew Research Centre for the People and the Press in a new survey.
About 53 percent of those polled said they would hold Republicans more responsible than Democrats for such an outcome; 27 percent said they would hold Obama responsible.
Washington interest groups are consumed by the cliff, and some are in a bit of a panic about what the talks might bring.
Tensions erupted on Tuesday at a forum convened by a fiscal responsibility group called Fix the Debt, which seeks to cut the government's debt and includes business and political leaders.
Audience members stood and repeatedly interrupted Republican Senator Rob Portman of Ohio as he attempted to make a speech. They urged protections from cuts for the Social Security and Medicare social safety net programs. Others shouted down the protesters until they marched out of the forum.