* At key meeting, Toomey proposal sparked hopes of deal
* Limiting deductions, means-testing among ideas discussed
* After trust evaporated, both sides blame intransigence
* Ideological gulf on tax and spending was too big
By Richard Cowan, Thomas Ferraro, Tim Reid and Donna Smith
WASHINGTON, Nov 22 (Reuters) - It didn’t seem like mission impossible just two weeks ago.
Inside a private room on the first floor of the U.S. Senate, seven members of Washington’s debt “super committee,” munching beef jerky and talking taxes, thought for the first time a deal might be at hand.
Nine days after that Nov. 7 meeting, it was all but over. Accusations of media leaks and bad faith had led to a fatal breakdown of trust among committee members fundamentally divided over the ideology of taxation and spending.
Trust that had been so painstakingly built by the six Republicans and six Democrats since the panel first began meeting nine weeks earlier unraveled at alarming speed.
By Nov. 16 the super committee was essentially dead, according to interviews with senior aides and officials with intimate knowledge of the talks.
The pivotal moments came on Nov. 7 and 8 in the private first floor office belonging to the Senate Finance Committee, chaired by Senator Max Baucus, one of the Democrats who sat on the debt panel.
The Nov. 7 evening meeting, which lasted nearly three hours, offered the first glimmer of hope that the panel might succeed in reaching a deficit-cutting agreement to meet its mandate: find at least $1.2 trillion in budget savings over 10 years.
“November 7 was kind of like the climax so to speak,” one Republican congressional aide with knowledge of the negotiations said.
Inside Baucus’s finance committee hideaway were seven of the 12 panel members: Republicans Pat Toomey, Rob Portman, Fred Upton and Dave Camp; and Democrats John Kerry, Max Baucus and Chris Van Hollen. The seven lawmakers convened at a critical moment for the debt panel, as the Nov. 23 deadline for a deal was just over two weeks away.
Just like that evening, for the previous nine weeks both sides had been meeting largely in secret and had been relatively successful in keeping their discussions private and out of the press. In the coming days that was going to change.
For more on the deficit-cutting panel [ID:nUSDEBT]
SNAP ANALYSIS-Fallout from panel failure [ID:nN1E7AJ0AL]
For a graphic, click on link.reuters.com/qyj25s]
Up to this point, trust had been built, and nurtured, on a committee formed after the debt limit crisis of the summer.
Kerry and Portman had discovered a mutual passion for cycling and regularly rode together. Committee members would often treat the other panel members to lunch during their meetings in Room 200 in the bowels of the U.S. Capitol.
Four dozen cupcakes were ordered to celebrate the birthday of Senator Patty Murray on Oct. 11, but they were not destined for the super committee. The panel did not meet until the following day so the chocolate and red velvet cakes were sent to her office and eaten by her staff - although the panel members still sang Happy Birthday to their Democratic co-chair on Oct. 12.
After a first meeting on Sept. 8, the next three weeks were taken up with discussions over how many meetings should be held, and when and where. Murray and congressman Jeb Hensarling, her Republican co-chair, had to resolve who got to hold the gavel. In the end a compromise - something very rare in Washington - was agreed. They were to alternate it.
When the Nov. 7 Baucus meeting began, the seven members there were ready to get down to brass tacks - although the session did not start well, according to both sides.
It opened with a discussion of a new Democratic proposal to raise taxes by $1 trillion, cut spending by $1 trillion, and spend another $300 billion to stimulate the economy.
The issue of tax increases had been a red flag for Republican negotiators all year, especially as most Republican members of Congress - including all six on the debt panel - had signed an anti-tax pledge authored by the powerful Washington conservative Grover Norquist.
“Grover Norquist has been the 13th member of the super committee without being there,” Kerry lamented to CNN on Monday.
At the mention of $1 trillion in tax hikes, according to aides, two of the Republicans threw up their hands. One thumped the table with his fist to emphasize their adamant opposition.
And as usually happened when discussions had become tense on the panel, staff were asked to leave so that the committee members members could “vent,” one aide said.
But then things got interesting. Toomey, a conservative, offered a new proposal that for the first time for a debt committee Republican included the prospect of revenue increases, as well as spending cuts, as a way to start cutting America’s massive $15 trillion national debt.
Toomey’s proposal called for limiting tax deductions and claimed $250 billion in “static revenue” to be used for deficit reduction, and another $50 billion boost from greater economic activity as the result of reforming the tax code and lowering all tax rates.
“The attention shifted to Toomey. It became the counter offer to the initial Democratic offer,” an aide said.
The Democrats immediately rejected Toomey’s proposal on revenues as too low, but Kerry began to explore the idea of building on it.
Kerry threw in the “mutual idea” of means-testing Medicare benefits, the federal insurance program for the elderly and disabled. Soon the discussion turned to how they could build on the Toomey plan, through other measures such as raising Medicare premiums and the sale of federal leases.
What initially became hardline opposition to the Toomey proposal became an opportunity for negotiation. “Maybe we can work a deal,” the Republican aide quoted Kerry as saying.
“There was real optimism when they walked out of the room,” the aide added.
But that was the high water mark for the debt super committee. Things were to change quickly.
“The Toomey offer was the beginning of the end,” a senior Democratic aide said.