By CAROL E. LEE, JOHN D. MCKINNON and NAFTALI BENDAVID

President Barack Obama and Republican leaders in Congress clashed Sunday over the scope of an effort to cut the federal deficit, one that could be shorn of its most ambitious elements, including revamping the tax code and significantly reducing growth in benefit programs.

Mr. Obama urged the top eight congressional leaders from both parties during a meeting that lasted about 75 minutes at the White House to strive for the largest possible package, some $4 trillion over 10 years. Republicans, however, made a pitch for a scaled-down plan of roughly $2 trillion over 10 years that doesn’t include about $1 trillion in tax increases the White House is seeking.

View Full Image

Associated Press

President Barack Obama and House Speaker John Boehner, left, meet with congressional leadership in the cabinet room of the White House on Sunday.

Republicans have tied a vote on raising the government’s $14.29 trillion borrowing limit to a deficit-reduction deal, and the tone of the Sunday meeting was tense and confrontational at times.

{if djIsFlashPossible}

The version of Adobe Flash Player required to view this interactive has not been found. To enjoy our complete interactive experience, please download a free copy of the latest version of Adobe Flash Player here

{else}

This content can not be displayed because your browser does not support the Adobe Flash player required to view it.

{/if}

Republican and Democratic leaders have said they won’t let the U.S. default, but the Treasury Department says the government could begin defaulting on its financial obligations, including debt payments, after Aug. 2 if the debt ceiling isn’t increased.

Officials from both parties said the leaders didn’t make any major progress toward reaching a deal that could win support from conservatives opposed to tax increases and liberals opposed to Medicare cuts.

Mr. Obama plans to host the same leaders again Monday and hold a news conference. The president asked Republicans to lay out at the Monday meeting the type of deficit reduction deal they would like to see, a Democratic official familiar with the discussion said.

An effort last week to negotiate an ambitious deficit-reduction deal reached an impasse Saturday because of forces still likely to bedevil negotiations over a smaller deal: tax increases and cuts to entitlement programs.

Mr. Obama and House Speaker John Boehner (R., Ohio) privately discussed and then announced their support last week for a framework for reaching a deal to reduce future deficits by $4 trillion over the next 10 years.

But Mr. Boehner backed away Saturday night as progress on a range of issues slowed. Emerging details of what it would take to reach the $4 trillion figure also made rank-and-file members of both parties balk.

He said negotiators should focus instead on a deal roughly half its size. Negotiators on each side also suggested the other side was being over-cautious.

In the meeting Sunday, Mr. Obama tried to break the logjam over taxes by saying he is willing to reform the tax code in a way so Republican members of Congress wouldn’t have to vote for a tax increase, a Democrat familiar with the discussion said.

Republicans restated their position that a $4 trillion plan, which would presumably include tax increases, couldn’t pass the House, and they emphasized the lack of time to pull the deal together and push it through, according to people briefed on the session.

Hitting the Ceiling

See what the federal debt limit has been at year-end since 1940.

View Interactive

• 
  
  More photos and interactive graphics
  
  

When Mr. Boehner made the point about timing, these people said, Mr. Obama responded that until then, the speaker had cited no concerns about the time.

Mr. Boehner told the group that he believes a package based on the work of the negotiating group led by Vice President Joe Biden is the most viable option at this point, according to a Boehner aide.

U.S. Treasury Secretary Timothy Geithner said the Obama Administration is still looking for a major deal on debt and the debt ceiling. Video courtesy Reuters.

Such a deal would still be a heavy legislative lift. The Biden negotiations fell apart last month when Democrats and Republicans reached an impasse over taxes, suggesting a smaller deal may not be any easier to achieve than the large deal.

Rep. Chris Van Hollen (D., Md.), a participant in the Biden talks, said the group had only identified roughly $1 trillion in cuts, and said on CNN’s “State of the Union” program that those were contingent on Republicans agreeing to some new taxes.

Mr. Boehner also restated his position that a deal requires spending cuts that are greater than the amount of the debt-ceiling increase and that no tax increases can be included. “The president agreed with the speaker that their previous talks did not produce any agreement,” the aide said.

Democratic officials briefed on Sunday’s meeting said Mr. Obama didn’t back down from his commitment to a big deal. “They definitely did not agree to scale back the size,” one official said.

But Republicans expressed dismay that Democrats weren’t pushing harder for a deal including major savings in Medicare and Social Security.

“It’s disappointing that the president is unable to bring his own party around to the entitlement reform that he put on the table,” said Don Stewart, spokesman for Senate Republican Leader Mitch McConnell, of Kentucky.

Senate Majority Leader Harry Reid lashed out at Republicans, saying this is just the latest in a series of bipartisan budget efforts they have derailed. “Every time we try to do something big about the deficit, you guys walk away,” he said, according to a Reid aide.

View Full Image

Associated Press

U.S. Treasury Secretary Timothy Geithner talks about the debt crisis on CBS’s “Face the Nation” in Washington Sunday.

Democratic officials noted that in the meeting, Mr. Boehner kept a lower profile and that his No. 2 in the House, Rep. Eric Cantor of Virginia, did most of the talking for the Republicans.

Mr. Boehner came under fierce pressure from Republicans Friday, including from Mr. Cantor, who rejected one cornerstone of the big deal: $1 trillion in tax increases along with corporate and individual tax reform.

At the same time, the White House was slow to move on significant changes to spending programs such as Medicare and Medicaid, a senior GOP aide said. “Rather than going to big issues, we spent a lot of time nickel and diming,” the aide said.

A Friday jobs report showing the unemployment rate rose to 9.2% in June hardened the Republican argument against tax hikes.

“I’m for the biggest deal possible, too,” Mr. McConnell said in an interview on Fox News Sunday. “But we’re not going to raise taxes in the middle of this horrible economic situation.”

People briefed on the Sunday meeting said Mr. Obama told congressional leaders they should meet every day until they reach a deal.

Treasury Secretary Timothy Geithner said Sunday the parties should agree on the outlines of a deal this week to meet the Aug. 2 deadline.

Mr. Geithner also said the financial markets could soon begin to react with concern, which could drive up interest rates and make borrowing more expensive.

The president told the lawmakers Sunday night he would reject a series of short-term debt ceiling increases because they would create too much uncertainty.

Messrs. Obama and Boehner began to seriously negotiate a $4 trillion deficit-reduction deal the week of June 27, when the speaker indicated he was open to raising revenues through the tax code, a senior administration official said.

To generate the revenue Mr. Obama needed to make a $4 trillion deal palatable for Democrats, Mr. Boehner agreed to explore letting the Bush-era tax cuts for the wealthiest Americans expire as scheduled in January 2013, while extending the cuts for Americans making under $250,000 a year.

In exchange, Mr. Obama would agree to significant savings in Medicare, Medicaid and Social Security and comprehensive tax reform to simplify the tax code and lower rates by early 2012.

—Janet Hook

and Damian Paletta contributed to this article.

Write to John D. McKinnon at john.mckinnon@wsj.com and Naftali Bendavid at naftali.bendavid@wsj.com

By JEREMY PAGE

BEIJING—Adm. Mike Mullen, Chairman of the U.S. Joint Chiefs of Staff, kicked off a visit to China with a vow to maintain the U.S. military presence in Asia and a warning that recent incidents in the disputed waters of the South China Sea could escalate into conflict.

At the start of a four-day visit, Adm. Mullen on Sunday acknowledged China as a fellow Pacific power, but urged its military to ease regional concerns about its rapid modernization by playing a more cooperative, responsible and transparent role in the world.

Adm. Mullen arrived Saturday on a reciprocal visit at the invitation of Gen. Chen Bingde, his Chinese counterpart, who visited the U.S. in May as part of bilateral efforts to rebuild military exchanges that resumed in January after a 12-month suspension by Beijing.

But even as both sides express their commitment to enhance military ties, tensions are mounting again over one of the most divisive issues between them—the South China Sea, where China, Taiwan, Vietnam, the Philippines, Malaysia and Brunei all have territorial claims.

View Full Image

Agence France-Presse/Getty Images

Admiral Mike Mullen, right, seen here alongside Defense Secretary Robert Gates during a committee hearing on Capitol Hill in March, is visiting Beijing in a bid to cool military tensions between the U.S. and China.

Adm. Mullen expressed concern about recent incidents in those waters that have provoked angry exchanges between China and two other claimants—Vietnam and the Philippines—as well as protests in Hanoi, the Vietnamese capital, over the past few weeks.

“We have an enduring presence here, we have an enduring responsibility,” Adm. Mullen told foreign reporters at a briefing. “We seek to strongly support the peaceful resolution of these differences. The worry, among others that I have, is that the ongoing incidents could spark a miscalculation, and an outbreak that no one anticipated and we should seek to avoid that under all circumstances.”

Several Southeast Asian nations—most notably Vietnam—have been strengthening military ties with the U.S. since Chinese military and civilian figures began using more strident rhetoric about their territorial claims early last year.

China has accused the U.S. of interfering in its territorial affairs since Hillary Clinton, the Secretary of State, declared in Hanoi last July that the U.S. had an interest in protecting freedom of navigation in the South China Sea. Beijing, which advocates resolving the territorial issues bilaterally without any U.S. involvement, has also repeatedly demanded that the U.S. cease aerial reconnaissance and joint exercises around what it sees as its territorial waters.

Adm. Mullen made it clear that the U.S. would maintain its military presence and activities in the region, which included low-level joint naval exercises with Japan and Australia in the South China Sea on Saturday.

“The U.S. is not going away,” he said. “Our enduring presence in this region has been important to our allies for decades and it will continue to be so.”

China’s Foreign Ministry did not respond to a request for comment about Saturday’s exercises, or Adm. Mullen’s comments Sunday. But the state-run China Daily, an English-language newspaper, said in an editorial Friday that Southeast Asian nations should not tolerate attempts by outside forces to interfere in bilateral disputes.

“Asia’s history proves outside forces have never worked whole-heartedly for Asian peace and development,” it said.

Speaking later Sunday to students at Renmin University in Beijing, Adm. Mullen urged China’s military to be more open about its modernization program. “With greater military power must come greater responsibility, greater cooperation, and just as important, greater transparency,” he said. “Without these things, the expansion of military power in your region, rather than making it more secure and stable, could have the opposite affect.”

The U.S. and many Asian countries have been alarmed by China’s rapid development of advanced weaponry—notably a stealth fighter, a prototype of which it test-flew in January, and an aircraft carrier expected to begin sea trials in August.

“There are some very specific capabilities that are being developed here that are very focused on the United States’ capability,” Adm. Mullen told the earlier briefing.

However, he said it was not clear whether China would be able to make use of the carrier’s full potential, given the huge cost and technical challenges.

“There is great symbolism associated with that and I understand that…. Sometimes matching the actual capability of it versus the symbolism of it, there can be a gap there so I, like you, wait to see what is forthcoming,” he said.

He also expressed hope that China and the U.S. could find more ways to cooperate on antipiracy patrols, humanitarian operations, and North Korea, and to communicate directly with each other to help resolve crises.

“China and the United States are both Pacific powers and will be for a long, long time. And we need to, from my perspective, approach this relationship as two leaders with all of the responsibilities that that implies,” he said. “And frankly I think we need to work a lot harder on strategic trust and transparency. And it’s my hope that these reciprocal visits will get us started in this direction and that they can be sustained even through difficult issues.”

Write to Jeremy Page at jeremy.page@wsj.com

By CAROL E. LEE, JOHN D. MCKINNON and NAFTALI BENDAVID

The White House and Republican leaders in Congress embarked on a new effort Sunday to cut the federal deficit, one that now appears to have been shorn of its most ambitious elements, including revamping the tax code and significantly reducing growth in benefit programs.

View Full Image

Associated Press

President Barack Obama and House Speaker John Boehner, left, meet with congressional leadership in the cabinet room of the White House on Sunday.

President Barack Obama and the top eight congressional leaders from both parties met at the White House for 75 minutes Sunday night in attempt to piece together a scaled-down package. It wasn’t clear if the leaders made progress on reaching a deal that could win support from conservatives opposed to tax increases and liberals opposed to Medicare cuts.

Aides to two leaders in the meeting said the group tentatively plans to meet again Monday.

Republicans have tied a vote on raising the government’s borrowing limit to a deficit-reduction deal. The Treasury Department says the U.S. will default on its financial obligations by Aug. 2, including debt payments, if the debt ceiling isn’t increased.

An effort last week to negotiate an ambitious deficit-reduction deal fell apart Saturday because of forces still likely to bedevil negotiations over a smaller deal: tax increases and cuts to entitlement programs.

Mr. Obama and House Speaker John Boehner (R., Ohio) privately discussed and then announced their support last week for a framework for reaching a deal to reduce future deficits by $4 trillion over the next 10 years.

But Mr. Boehner backed away Saturday night as progress on a range of issues slowed. Emerging details of what it would take to reach the $4 trillion figure also made rank-and-file members of both parties balk. He said negotiators should focus instead on a deal roughly half its size. Negotiators on each side also suggested the other side was being over-cautious.

Hitting the Ceiling

See what the federal debt limit has been at year-end since 1940.

View Interactive

• 
  
  More photos and interactive graphics
  
  

Mr. Boehner came under fierce pressure from Republicans, including his No. 2 in the House, Rep. Eric Cantor of Virginia, who rejected one cornerstone of the big deal: $1 trillion in tax increases along with corporate and individual tax reform. At the same time, Democrats—including the White House—were too wary of changes to Medicare, Medicaid and Social Security, Republicans complained.

A Friday jobs report showing the unemployment rate rose to 9.2% in June hardened the Republican argument against tax hikes. “I’m for the biggest deal possible, too,” Senate Minority Leader Mitch McConnell (R., Ky.) said in an interview on Fox News Sunday. “But we’re not going to raise taxes in the middle of this horrible economic situation.”

When asked at the start of the meeting Sunday night whether a deal to cut the deficit and raise the debt ceiling could be done in 10 days, President Obama said, “We need to.”

The president entered the meeting prepared to make the case that a $4 trillion deal is still possible. White House chief of staff Bill Daley said on Sunday that Mr. Obama “is not giving up.” “This president is committed to bringing economic soundness to this country, and that takes a big deal,” Mr. Daley said in an interview on the ABC News program “This Week.”

Mr. Boehner’s statement Saturday night said leaders should strive for a deficit-reduction plan closer to $2 trillion over 10 years, as lawmakers and the White House had for weeks pursued in talks led by Vice President Joe Biden.

U.S. Treasury Secretary Timothy Geithner said the Obama Administration is still looking for a major deal on debt and the debt ceiling. Video courtesy Reuters.

Such a deal would still be a heavy legislative lift. The Biden negotiations fell apart last month when Democrats and Republicans reached an impasse over taxes, suggesting a smaller deal may not be any easier to achieve than the large deal.

Rep. Chris Van Hollen (D., Md.), a participant in the Biden talks, said the group had only identified roughly $1 trillion in cuts, and said those were contingent on Republicans agreeing to some new taxes. “Our Republican colleagues are dreaming,” if they think Democrats will agree to $2 trillion or more in cuts without any accompanying revenue increases, he said on CNN’s “State of the Union” program.

Lawmakers have just three weeks to reach a deficit-reduction deal in time for Congress to pass legislation to raise the $14.29 trillion debt ceiling. One idea that’s gotten attention lately involves re-calibrating how inflation is measured for a variety of federal programs, from the tax code to benefit programs such Social Security. It has been discussed in deficit talks, but it’s unclear yet whether it could become part of a scaled-down deal.

Treasury Secretary Timothy Geithner said Sunday the parties should agree on the outlines of a deal this week to meet the Aug. 2 deadline.

Mr. Geithner also said the financial markets could soon begin to react with concern, which could drive up interest rates and make borrowing more expensive.

Messrs. Obama and Boehner began to seriously negotiate a $4 trillion deficit-reduction deal the week of June 27, when the speaker indicated he was open to raising revenues through the tax code, a senior administration official said.

To generate the revenue Mr. Obama needed to make a $4 trillion deal palatable for Democrats, Mr. Boehner agreed to explore letting the Bush-era tax cuts for the wealthiest Americans expire as scheduled in January 2013, while extending the cuts for Americans making under $250,000 a year.

In exchange, Mr. Obama would agree to significant savings in Medicare, Medicaid and Social Security and comprehensive tax reform to simplify the tax code and lower rates by early 2012.

That time line was designed to allow Mr. Boehner to argue that the tax increase for upper-income people would never actually take effect.

The big deal appears to have collapsed over a disagreement on how to structure tax reform.

Mr. Boehner offered an approach, but the White House objected, saying it would unduly benefit higher earners.

A senior administration official said the administration, in a counteroffer late last week, insisted on maintaining a tax code in which tax rates rise with household income and upper-income earners pay a disproportionately large share of total taxes.

View Full Image

Associated Press

U.S. Treasury Secretary Timothy Geithner talks about the debt crisis on CBS’s “Face the Nation” in Washington Sunday.

The White House said it would be fine with lowering rates for everyone, but would not accept letting top earners pay a smaller share of total taxes, a senior administration official said.

By late Saturday afternoon the White House was still waiting for a response from Mr. Boehner’s office on the tax proposals, the senior administration official said.

Instead Mr. Boehner reached out Saturday night to Mr. Obama to tell him he was backing away from the big deal.

One senior Republican aide said Mr. Boehner’s decision was driven in part by the intensifying public and private discussion of the deal on Friday, after which he concluded he couldn’t sell the tax proposal to his GOP caucus.

Given the difficulty lawmakers had reaching a deal of that scale, some people familiar with the talks believe it may not be possible to reach any long-term agreement before the markets become jittery and that a short-term deal may be necessary. Mr. Obama has threatened to veto a short-term deal.

—Janet Hook

and Damian Paletta contributed to this article.

Write to Damian Paletta at damian.paletta@wsj.com and Ian Talley at ian.talley@dowjones.com

By JAY SOLOMON And ADAM ENTOUS

WASHINGTON—The Obama administration confirmed it has suspended hundreds of millions of dollars in military aid to Pakistan, senior U.S. officials said, due to slackening support by the country for Washington’s fight against al Qaeda and the Taliban.

This “pause” in aid disbursement was specifically tied to Islamabad’s decision to expel U.S. military trainers from Pakistan following the May killing of al Qaeda leader Osama bin Laden by a U.S. special-operations unit.

The White House didn’t notify Pakistan’s military commanders ahead of time about the operation conducted deep inside the South Asian country. The incident has fueled heightened anti-American sentiment among Islamabad’s top brass and led to diminished cooperation, according to senior U.S. officials.

“Right now, they have taken some steps that have given us reason to pause on some of the aid which we were giving to their military, and we’re trying to work through that, and it’s a complicated relationship in a very difficult, complicated part of the world,” White House Chief of Staff William Daley said Sunday on ABC News’s “This Week.”

The New York Times reported in Sunday’s editions that about $800 million in military aid and equipment to Pakistan could be affected in the suspension. Mr. Daley confirmed this figure.

“The Pakistani relationship is difficult, but it must be made to work over time,” Mr. Daley said. “But until we get through these difficulties, we will hold back some of the money that the American taxpayers have committed to giving.”

U.S. military officials said some aid items placed on hold are directly related to the work of American trainers who Pakistan expelled in May. This includes: intelligence, reconnaissance and surveillance equipment, small arms and military hardware used to dispose of explosive ordinance.

The Pentagon also is withholding equipment directly tied to military programs overseen by U.S. officials who have been denied visas to enter Pakistan since bin Laden’s death. This includes: night-vision devices; helicopter spare parts; UHF and VHF radios, and equipment used to detect and dispose of roadside bombs and other improvised explosive devices, or IEDs.

Write to Jay Solomon at jay.solomon@wsj.com and Adam Entous at adam.entous@wsj.com

By JEREMY PAGE

BEIJING—Adm. Mike Mullen, Chairman of the U.S. Joint Chiefs of Staff, kicked off a visit to China with a vow to maintain the U.S. military presence in Asia and a warning that recent incidents in the disputed waters of the South China Sea could escalate into conflict.

At the start of a four-day visit, Adm. Mullen on Sunday acknowledged China as a fellow Pacific power, but urged its military to ease regional concerns about its rapid modernization by playing a more cooperative, responsible and transparent role in the world.

Adm. Mullen arrived Saturday on a reciprocal visit at the invitation of Gen. Chen Bingde, his Chinese counterpart, who visited the U.S. in May as part of bilateral efforts to rebuild military exchanges that resumed in January after a 12-month suspension by Beijing.

But even as both sides express their commitment to enhance military ties, tensions are mounting again over one of the most divisive issues between them—the South China Sea, where China, Taiwan, Vietnam, the Philippines, Malaysia and Brunei all have territorial claims.

View Full Image

Agence France-Presse/Getty Images

Admiral Mike Mullen, right, seen here alongside Defense Secretary Robert Gates during a committee hearing on Capitol Hill in March, is visiting Beijing in a bid to cool military tensions between the U.S. and China.

Adm. Mullen expressed concern about recent incidents in those waters that have provoked angry exchanges between China and two other claimants—Vietnam and the Philippines—as well as protests in Hanoi, the Vietnamese capital, over the past few weeks.

“We have an enduring presence here, we have an enduring responsibility,” Adm. Mullen told foreign reporters at a briefing. “We seek to strongly support the peaceful resolution of these differences. The worry, among others that I have, is that the ongoing incidents could spark a miscalculation, and an outbreak that no one anticipated and we should seek to avoid that under all circumstances.”

Several Southeast Asian nations—most notably Vietnam—have been strengthening military ties with the U.S. since Chinese military and civilian figures began using more strident rhetoric about their territorial claims early last year.

China has accused the U.S. of interfering in its territorial affairs since Hillary Clinton, the Secretary of State, declared in Hanoi last July that the U.S. had an interest in protecting freedom of navigation in the South China Sea. Beijing, which advocates resolving the territorial issues bilaterally without any U.S. involvement, has also repeatedly demanded that the U.S. cease aerial reconnaissance and joint exercises around what it sees as its territorial waters.

Adm. Mullen made it clear that the U.S. would maintain its military presence and activities in the region, which included low-level joint naval exercises with Japan and Australia in the South China Sea on Saturday.

“The U.S. is not going away,” he said. “Our enduring presence in this region has been important to our allies for decades and it will continue to be so.”

China’s Foreign Ministry did not respond to a request for comment about Saturday’s exercises, or Adm. Mullen’s comments Sunday. But the state-run China Daily, an English-language newspaper, said in an editorial Friday that Southeast Asian nations should not tolerate attempts by outside forces to interfere in bilateral disputes.

“Asia’s history proves outside forces have never worked whole-heartedly for Asian peace and development,” it said.

Speaking later Sunday to students at Renmin University in Beijing, Adm. Mullen urged China’s military to be more open about its modernization program. “With greater military power must come greater responsibility, greater cooperation, and just as important, greater transparency,” he said. “Without these things, the expansion of military power in your region, rather than making it more secure and stable, could have the opposite affect.”

The U.S. and many Asian countries have been alarmed by China’s rapid development of advanced weaponry—notably a stealth fighter, a prototype of which it test-flew in January, and an aircraft carrier expected to begin sea trials in August.

“There are some very specific capabilities that are being developed here that are very focused on the United States’ capability,” Adm. Mullen told the earlier briefing.

However, he said it was not clear whether China would be able to make use of the carrier’s full potential, given the huge cost and technical challenges.

“There is great symbolism associated with that and I understand that…. Sometimes matching the actual capability of it versus the symbolism of it, there can be a gap there so I, like you, wait to see what is forthcoming,” he said.

He also expressed hope that China and the U.S. could find more ways to cooperate on antipiracy patrols, humanitarian operations, and North Korea, and to communicate directly with each other to help resolve crises.

“China and the United States are both Pacific powers and will be for a long, long time. And we need to, from my perspective, approach this relationship as two leaders with all of the responsibilities that that implies,” he said. “And frankly I think we need to work a lot harder on strategic trust and transparency. And it’s my hope that these reciprocal visits will get us started in this direction and that they can be sustained even through difficult issues.”

Write to Jeremy Page at jeremy.page@wsj.com

BY ADAM ENTOUS

BAGHDAD—Leon Panetta made his first visit to Baghdad as U.S. defense secretary to deliver a tough message to the Iraqi government that its security forces need to do more to stem increasingly deadly attacks by Iranian-backed militias on American troops.

Pentagon impatience with the government of Prime Minister Nouri al-Maliki has been building for months as the U.S. military presses for a long-awaited decision from Baghdad about whether it will request that some U.S. troops remain in Iraq beyond the end of this year.

The surge in deadly attacks has ratcheted up the pressure on both sides. Mr. Panetta made …

BY PATRICK O’CONNOR

WHITE EARTH, Minn.—Republican presidential hopeful Michele Bachmann touts one job as her primary professional experience before entering politics. On the campaign trail, she describes it as being a “federal tax litigation attorney.” Others might call it tax collector.

Ms. Bachmann spent four years with the Internal Revenue Service district counsel office in St. Paul, Minn., from 1988 to 1992, and “worked on hundreds of civil and criminal cases,” according to her congressional website.

This part of her resume cuts two ways for Ms. Bachman, who ranks near the top of the GOP field in polls of New Hampshire and Iowa, …

By CAROL E. LEE and COREY BOLES

WASHINGTON–House Speaker John Boehner (R., Ohio) said the White House and congressional leaders have stopped pursuing the major deficit-reduction deal tackling entitlement programs and an overhaul of the tax code that he and President Barack Obama had been seeking.

View Full Image

Associated Press

House Speaker John Boehner of Ohio

A statement from Mr. Boehner issued late Saturday, after a conversation with Mr. Obama, said efforts by both parties to reach a deal to reduce the federal deficit by $4 trillion over the next decade reached an impasse this weekend over the issue of taxes. Mr. Boehner said negotiators will instead work toward an agreement closer to $2 trillion.

“Despite good-faith efforts to find common ground, the White House will not pursue a bigger debt reduction agreement without tax hikes,” Mr. Boehner said. “I believe the best approach may be to focus on producing a smaller measure, based on the cuts identified in the Biden-led negotiations, that still meets our call for spending reforms and cuts greater than the amount of any debt limit increase.”

Mr. Boehner’s statement comes in advance of talks between the White House and the top eight leaders in Congress scheduled to be held Sunday night.

Dan Pfeiffer, the White House communications director, said that in solving fiscal problems “we cannot ask the middle-class and seniors to bear all the burden of higher costs and budget cuts. We need a balanced approach that asks the very wealthiest and special interests to pay their fair share as well, and we believe the American people agree.”

Mr. Pfeiffer said that the president, in tomorrow’s meeting, “will make the case to congressional leaders that we must reject the politics of least resistance and take on this critical challenge.”

Messrs. Obama and Boehner had agreed to shoot for a $4 trillion deal that would include up to $1 trillion in tax increases, which Republicans have resisted, and significant savings in Medicare, Medicaid and Social Security, which drew criticism from Democrats. Their hope was to go beyond the minimum deal necessary to win votes in Congress necessary to raise the federal debt ceiling and to make a landmark strike at deficit spending.

The move also comes just 24 days before the U.S. government could begin defaulting on its obligations if Congress hasn’t reach a deal by Aug. 2 to raise the $14.29 trillion borrowing limit. Lawmakers from both sides agree that a deal to cut the deficit is a prerequisite to win the votes needed to lift the debt limit.

Both taxes and entitlements became too much of a hurdle, a Republican familiar with the discussion said. Staff-level negotiators had been working since Thursday to bridge differences between the two parties.

“The White House would not agree with the core elements of tax reform proposed by the speaker,” the Republican familiar with the discussions said. “A gulf also remains between the Speaker and the White House on the issue of medium and long-term structural reforms.”

The deficit-cutting deal now being sought is likely to draw heavily on the work done by a bipartisan group led by Vice President Joe Biden, which had identified $2.4 trillion in deficit reductions, largely from a variety of spending cuts.

The president and the Speaker may find it easier to sell the smaller deal to their rank-and-file troops in Congress, in part because some in both parties were frightened by some of the elements they contemplated in the bigger deal.

One Democratic congressional aide said it still will be difficult to get a $2 trillion deal, but not nearly as difficult as the big deal would have been. He reflected the general lack of rank-and-file enthusiasm for the big deal by saying, “Republicans are breathing a sigh of relief that they didn’t touch the Bush tax cuts. We’re breathing a sigh of relief that we’re not doing Social Security cuts.”

Both Mr. Boehner and Mr. Obama saw possibility for a large agreement after Mr. Obama agreed to consider savings in Medicare, Medicaid and Social Security. In return, Mr. Obama would have insisted on tax loopholes and tax increases on the wealthy, in particular the expiration of the Bush tax cuts for upper income earners.

But Mr. Boehner encountered considerable resistance from GOP lawmakers over the tax component. Negotiations working on a $4 trillion deal also disagreed over Mr. Boehner’s insistence on a so-called trigger mechanism that would mandate that spending cuts take effect if certain tax reforms were not accomplished this year, a Republican familiar with the discussions said. Mr. Boehner submitted a tax reform proposal to the White House on Friday, the Republican said, but the White House did not agree to it.

Many groups had argued that a $4 trillion deficit-reduction deal, spaced out over 10 years, would be the ideal size because the nation’s deficits would be a much lower percent of the country’s economy. A smaller deal could be sold as a “downpayment” by policymakers, but it won’t be enough on its own to stop the trajectory of ballooning deficits, which are expected to worsen in the next decade because of the aging U.S. population and rising health care costs.

“It’s unfortunate if they can’t find a way to make a big deal workable, because anything short of that means we are going to have to go through all of these difficult negotiations again in the near future,” said Maya Macguineas, president of the nonpartisan Committee for a Responsible Federal Budget.

A spokesman for Rep. Eric Cantor, the second-ranking Republican in the House, said that the tax increases Democrats have sought “cannot pass the House and are the last thing Congress should do with so many people out of work.” He also said Mr. Cantor thinks the group Vice President Biden led has produced “the framework for an agreement.”

Democratic Rep. Chris Van Hollen, who was part of the Biden group, said in a statement that “the Republican fixation with protecting tax breaks for corporate special interests and the very wealthy prevented them from agreeing to a balanced and broad deficit reduction plan to help our economy and our country.”

Write to Corey Boles at corey.boles@dowjones.com

By CAROL E. LEE and COREY BOLES

WASHINGTON–House Speaker John Boehner (R., Ohio) said the White House and congressional leaders have stopped pursuing the major deficit-reduction deal tackling entitlement programs and an overhaul of the tax code that he and President Barack Obama had been seeking.

View Full Image

Associated Press

House Speaker John Boehner of Ohio

A statement from Mr. Boehner issued late Saturday, after a conversation with Mr. Obama, said efforts by both parties to reach a deal to reduce the federal deficit by $4 trillion over the next decade reached an impasse this weekend over the issue of taxes. Mr. Boehner said negotiators will instead work toward an agreement closer to $2 trillion.

“Despite good-faith efforts to find common ground, the White House will not pursue a bigger debt reduction agreement without tax hikes,” Mr. Boehner said. “I believe the best approach may be to focus on producing a smaller measure, based on the cuts identified in the Biden-led negotiations, that still meets our call for spending reforms and cuts greater than the amount of any debt limit increase.”

Mr. Boehner’s statement comes in advance of talks between the White House and the top eight leaders in Congress scheduled to be held Sunday night. The White House didn’t have any immediate comment.

Messrs. Obama and Boehner had agreed to shoot for a $4 trillion deal that would include up to $1 trillion in tax increases, which Republicans have resisted, and significant savings in Medicare, Medicaid and Social Security, which drew criticism from Democrats. Their hope was to go beyond the minimum deal necessary to win votes in Congress necessary to raise the federal debt ceiling and to make a landmark strike at deficit spending.

The move also comes just 24 days before the U.S. government could begin defaulting on its obligations if Congress hasn’t reach a deal by Aug. 2 to raise the $14.29 trillion borrowing limit. Lawmakers from both sides agree that a deal to cut the deficit is a prerequisite to win the votes needed to lift the debt limit.

Both taxes and entitlements became too much of a hurdle, a Republican familiar with the discussion said. Staff-level negotiators had been working since Thursday to bridge differences between the two parties.

“The White House would not agree with the core elements of tax reform proposed by the speaker,” the Republican familiar with the discussions said. “A gulf also remains between the Speaker and the White House on the issue of medium and long-term structural reforms.”

The deficit-cutting deal now being sought is likely to draw heavily on the work done by a bipartisan group led by Vice President Joe Biden, which had identified $2.4 trillion in deficit reductions, largely from a variety of spending cuts.

The president and the Speaker may find it easier to sell the smaller deal to their rank-and-file troops in Congress, in part because some in both parties were frightened by some of the elements they contemplated in the bigger deal.

One Democratic congressional aide said it still will be difficult to get a $2 trillion deal, but not nearly as difficult as the big deal would have been. He reflected the general lack of rank-and-file enthusiasm for the big deal by saying, “Republicans are breathing a sigh of relief that they didn’t touch the Bush tax cuts. We’re breathing a sigh of relief that we’re not doing Social Security cuts.”

Both Mr. Boehner and Mr. Obama saw possibility for a large agreement after Mr. Obama agreed to consider savings in Medicare, Medicaid and Social Security. In return, Mr. Obama would have insisted on tax loopholes and tax increases on the wealthy, in particular the expiration of the Bush tax cuts for upper income earners.

But Mr. Boehner encountered considerable resistance from GOP lawmakers over the tax component. Negotiations working on a $4 trillion deal also disagreed over Mr. Boehner’s insistence on a so-called trigger mechanism that would mandate that spending cuts take effect if certain tax reforms were not accomplished this year, a Republican familiar with the discussions said. Mr. Boehner submitted a tax reform proposal to the White House on Friday, the Republican said, but the White House did not agree to it.

Many groups had argued that a $4 trillion deficit-reduction deal, spaced out over 10 years, would be the ideal size because the nation’s deficits would be a much lower percent of the country’s economy. A smaller deal could be sold as a “downpayment” by policymakers, but it won’t be enough on its own to stop the trajectory of ballooning deficits, which are expected to worsen in the next decade because of the aging U.S. population and rising health care costs.

“It’s unfortunate if they can’t find a way to make a big deal workable, because anything short of that means we are going to have to go through all of these difficult negotiations again in the near future,” said Maya Macguineas, president of the nonpartisan Committee for a Responsible Federal Budget.

Write to Corey Boles at corey.boles@dowjones.com

By JOHN D. MCKINNON

Ideas for closing the government’s yawning fiscal deficits keep getting more creative and complicated.

One idea being floated would basically try to plug a couple of slow leaks that have developed over the years in the federal government’s finances. These arise from two related tax policies, the alternative-minimum tax and the Bush tax cuts.

The AMT is a tax increase that Congress keeps postponing. The Bush tax breaks are a set of tax cuts that Congress keeps extending. Both actions add significantly to annual deficits.

Now, the Obama administration and many lawmakers apparently would like to solve both of those political problems once and for all.

But fixing them costs more money, and doing it in a package that is supposed to be reducing deficits, rather than increasing them, is going to be tricky to say the least.

The AMT was originally designed to hit high-income people who accumulate so many deductions and other breaks that they don’t pay much tax under the regular rules. But the AMT was never indexed for inflation. Now, it threatens to hit tens of millions of middle-class taxpayers each year. So Congress keeps patching the rules to exempt most people who would otherwise be hit. This annual exercise has gotten brutally expensive — the patch Congress passed in December to get us through 2011 cost $137 billion.

Now the Obama administration reportedly is trying to get some kind of additional AMT patch, at least for 2012, maybe longer. But the long-term outlook is daunting. To repeal the AMT outright would cost the government $1.6 trillion — that’s trillion — over the next decade, according to President Obama’s budget. Accomplishing that in a debt-ceiling package that is supposed to be lowering the federal deficit instead of raising it is going to be challenging to say the least.

The Bush tax cuts are an even tougher problem. They are now set to expire at the end of 2012. But nearly everyone in Congress — as well as President Obama — wants to extend them for middle-class taxpayers, never mind the dire deficit situation. The only real fight is whether to extend them for higher-income earners (which is a somewhat less-costly proposition, although still pricey).

By late last year, the estimated cost to the government of extending the middle-class breaks was around $1.3 trillion, plus interest and some impact on the AMT. (The Bush tax cuts make the AMT problem worse.) The cost of extending the upper-income breaks was around $700 billion, plus the related interest and AMT costs.

Lawmakers and the White House appear to be trying to wrestle with the Bush breaks in the debt-ceiling debate. But the outlook is unclear.

Admitting you have a deficit problem is the first step in fiscal recovery, of course. Unfortunately, Congress might have more deficit problems than it can deal with in one package.

Write to John D. McKinnon at john.mckinnon@wsj.com

BY RYAN TRACY AND STEPHANIE GLEASON

The light-bulb wars are back on.

Energy Secretary Steven Chu came out swinging Friday against a House bill that would repeal a 2007 federal law effectively outlawing older forms of incandescent bulbs—an effort at energy conservation that has inflamed a wide swath of Americans who don’t care for the more expensive alternatives.

In a conference call with reporters, Mr. Chu said the more-efficient bulbs required would save consumers money over the life of the product, even if the up-front price is higher.

“We are taking away a choice that continues to let people waste their own money,” he said.

The …

By JACOB GERSHMAN

New York state’s botched effort to modernize its Medicaid billing system is becoming an increasingly costly mistake.

Over the past decade, the state has paid a Virginia-based IT company nearly $1 billion to set up and operate a Medicaid billing and processing system hobbled by delays, cost overruns and programming flaws.

State audits have criticized the payments to Computer Sciences Corp. as excessive. But the total is likely to grow by hundreds of millions of dollars, as longstanding plans to pull the plug on the contract and replace the system appear to have been put on hold.

Known as eMedNY, the state’s Medicaid management information system is the largest of its kind in the nation, processing roughly $47 billion in claims a year—12 claims a second. It’s the system that mails checks to tens of thousands of doctors, hospitals, nursing homes and others enrolled in the insurance program. And it serves as the main Medicaid data hub for financial reporting, quality measures, auditing and fraud control.

Dozens of state audits and reports have pointed to problems with the billing system, prompting the state in 2007 to start looking for a new vendor.

Now, the Cuomo administration is strongly considering shelving those plans, according to individuals familiar with the administration’s thinking.

Health officials, who issued a request for proposals for a new system last year, had been planning to award a new contract by the end of the year. At least two other companies are vying for the contract, including Hewlett-Packard and Affiliated Computer Services, a division of Xerox.

Cuomo officials now say they’re rethinking the entire plan and conducting a broader review of the state’s billing system. That’s left the status of the contract in limbo—and payments to CSC flowing indefinitely.

The administration says the Medicaid program’s move toward managed care and away from fee-for-service means that managed-care companies will assume more responsibility over the review of payment claims. Officials say the state may not need the same kind of billing and data system it had originally sought. Cuomo officials say they intend to complete their review by the end of the summer.

“Given the changes, it is both sensible and responsible to take time now to review the systems improvements that will be required in the short term and the system that will be most appropriate for the long term,” said James Introne, deputy secretary for health, in a statement.

“While eMedNY admittedly limits the State’s ability to introduce programs that could help control fraud and abuse through better claims management, the transition to managed care will be nearly complete before a replacement system could be brought on line,” he said.

A spokesman for CSC, Joel Shadle, said the company “has demonstrated accurate and cost-effective administration for the eMedNY program.”

The state first approved the CSC contract in 2000 and projected that it would cost $357 million to develop and operate the system. It became fully operational only in 2005, taking nearly three years longer than expected for CSC to get crucial processing and reporting functions off the ground, according to the state comptroller’s office.

Those delays increased payments to CSC by an additional $66 million. The state health department then granted the company a three-year extension in 2006, increasing fixed operating fees by 54%. Then-Comptroller Alan Hevesi initially refused to approve the extension, claiming the health department and CSC failed to justify the higher rate.

The comptroller’s office changed course after the company threatened to stop making Medicaid payments if the extension wasn’t approved when the original contract expired. The comptroller’s office said it had no choice but to sign off on the amended contract because the state lacked a back-up plan to avoid a dangerous shutdown of the Medicaid program.

CSC argued that the company simply wanted assurances that the state was going to reimburse the company for expenses outside the existing contract that it had already incurred, an individual familiar with CSC’s thinking said.

“How much leverage does this state have when they have to continue to make Medicaid payments—and if the vendor walks, the public well-being is at stake?” said a state official.

In the meantime, dozens of state audits conducted between 2006 and 2010 found that health officials lacked oversight over the system’s payment functions and that eMedNY routinely failed to catch billings mistakes, resulting in more than $450 million in over-payments, according to Comptroller Thomas DiNapoli, who approved another three-year extension ending in 2012.

When billing errors arose, health officials said it took months to rewrite codes to correct them; the company argued that it worked as quickly as it could within the constraints of a large government.

“It’s an incredibly antiquated system. They need to get rid of it and modernize,” a former senior state health official said.

Write to Jacob Gershman at jacob.gershman@wsj.com

BY LISA FLEISHER

New Jersey businesses are again seeing their labor taxes go up slightly this year to pay for the state’s unemployment insurance fund, which pays unemployment benefits—but it could have been worse.

With the state’s unemployment rate stuck above 9% for more than two years, New Jersey lawmakers have put off steep tax increases designed to replenish the fund, which went broke in March 2009.

The fund is designed to remain in balance. As it drains, businesses are supposed to kick in more money to prop it up. Instead, New Jersey has put off the day of reckoning by pumping general …

BY MICHAEL HOWARD SAUL

Republican and Conservative party leaders tapped Bob Turner, a businessman who captured roughly 40% of the vote in an unsuccessful bid to unseat then-U.S. Rep. Anthony Weiner last year, to be the parties’ nominee in the upcoming special election for the former congressman’s seat.

Mr. Turner, 70 years old, will face state Assemblyman David Weprin, a 55-year-old Democrat from Queens, in the Sept. 13 election. Mr. Weiner resigned last month after admitting he exchanged lewd online photos and messages with women …

By DOUGLAS BELKIN

CHICAGO—For 28 years, city Alderman Edward Burke has been protected by a squad of four bodyguards, a perquisite almost unheard of among municipal legislators.

Now pressure is building for Mr. Burke’s security detail to be eliminated, creating a dilemma for Rahm Emanuel, the new Chicago mayor who campaigned on the mantra of reform.

View Full Image

Associated Press

Chicago Alderman Edward Burke spoke at a city council meeting in May.

Mr. Burke so far has refused to relinquish his security protection, in which two bodyguards are assigned to him at any one time. Mr. Emanuel could push to revoke it, but he needs a healthy relationship with the alderman, who has the clout to block the mayor’s agenda. At the same time, critics are howling that a city with a $700 million budget deficit can no longer afford such things.

“This is a city that doesn’t have enough money for basic services right now and doesn’t have enough money to protect regular citizens,” said Andy Shaw, president and chief executive of the Better Government Association, a watchdog group in Chicago. “The question has to be asked whether a full-time bodyguard detail to one alderman who hasn’t been shown to be in any kind of danger for more than two decades is warranted.”

The debate is playing out against Chicago’s record of providing generous security for elected officials.

In addition to Messrs. Emanuel and Burke, Chicago’s city treasurer, the president of the Cook County Board, former mayor Richard M. Daley, and, until last month, the head of the public housing authority have security details paid for by the public. Of the city’s 50 aldermen, Mr. Burke is the only one protected by bodyguards. Police officials declined to say how much the various security details cost.

Among the other nine largest U.S. cities, eight police departments provide protection for only the mayor, the departments said. In New York City, the mayor and two other officials get full-time security.

In an effort to make good on his campaign promises to change business as usual, Mr. Emanuel has posted salaries of government workers online, improved lobbying disclosure, asked unions to share in the sacrifice of the budget shortfall and forced out the head of the Chicago Housing Authority after he used his city credit card to pick up restaurant tabs.

But after promising during his campaign to cancel Mr. Burke’s security detail, Mr. Emanuel now says the issue is being studied.

A spokeswoman for Mr. Emanuel said in a statement that Chicago’s police superintendent is assessing the security needs of all public officials. “Once complete we will take action appropriately,” she said.

Despite the recent criticism over the bodyguards, Mr. Burke remains a popular politician in his ward, where he has rarely faced a serious election challenge in more than four decades in office.

Mr. Burke, 67 years old, received his security detail in 1983, when he was a prominent critic of Harold Washington, the city’s first black mayor, and the city was deep in racial and political strife.

In 1986, the acting Chicago police commissioner tried to reduce the number of Mr. Burke’s bodyguards to two from four. The alderman sued the city, arguing that the move was political retaliation. The police countered that the manpower was no longer necessary because threats against Mr. Burke had petered out, according to court transcripts.

Mr. Burke’s attorney argued at the time that his client wouldn’t be safe with only one officer assigned to him. If he was being pursued by an attacker at high speed in a car, the lone bodyguard would have difficulty driving while simultaneously calling for backup and shooting at the pursuer, the lawyer said, according to transcripts filed in Cook County Circuit Court.

The court sided with Mr. Burke, who went on to become Mayor Richard M. Daley’s key legislative ally. The court also said the matter should be reviewed every few years.

Mr. Burke declined to comment but told reporters in June “a court order is a court order and, in order to change it, there would have to be a hearing.”

Alderman Scott Waguespack, who has criticized Mr. Burke for keeping his detail, said Mr. Burke was testing the new mayor’s willingness to stand up to the alderman. Mr. Emanuel recently reappointed Mr. Burke as head of Chicago’s finance committee, a position that gives the alderman tremendous sway over city affairs. “It’s made [Mr. Emanuel] look weaker than a lot of people thought he is,” Mr. Waguespack said.

The criticism of Mr. Burke has drawn attention to the security details allotted to other officials, especially the one assigned to Mr. Daley, who left office in May after 22 years. Mr. Daley didn’t return a call seeking comment.

In May, before he stepped down, Mr. Daley told reporters he had been the subject of threats throughout his career and defended the need for a continued security detail. “The safety of my family comes first,” he said.

Write to Douglas Belkin at doug.belkin@wsj.com

By DANNY YADRON

Bob Vander Plaats, an activist for socially conservative causes, has the kind of sway with Iowa Republicans that has drawn the GOP presidential candidates to his door. He says he plans to endorse one.

But first, Mr. Vander Plaats wants to know: Will the candidates sign his pledge to oppose gay marriage, pornography and Sharia, or Islamic law?

On the List for 2012?

Read about the potential Republican presidential contenders.

View Interactive

• 
  
  More photos and interactive graphics
  
  

• 
  
  Bios: Potential GOP Contenders
  (FOR SUMMARY BULLET)
  

Mr. Vander Plaats’ pledge is one of several that activists or groups are putting before the candidates. An alliance including Sen. Jim DeMint (R., S.C.) and FreedomWorks, both backers of tea-party groups, want candidates to sign a “Cut, Cap and Balance” promise on budget policy. Another group, the Susan B. Anthony List, is advancing an antiabortion pledge.

The most famous: A pledge to oppose all tax increases, initiated 25 years ago by Grover Norquist and his group, Americans for Tax Reform.

Each initiative—at least five groups have sponsored a pledge—has drawn signatures from some of the top GOP candidates. Mr. Vander Plaats, who led the successful effort last year to oust three Iowa Supreme Court justices for a ruling on gay marriage, unveiled his pledge this week and says he quickly received promises from Rep. Michele Bachmann (R.-Minn.) and former Sen. Rick Santorum that they would sign.

Sponsors say their pledges elevate important issues and force candidates to take a stand. But some Republicans say the pledges are problematic, and that candidates should express their positions in their own words, rather than cede the terms to outside groups.

Sen. Kelly Ayotte (R., N.H.) declined to sign the FreedomWorks-backed pledge because it was too confining on fiscal policy, she said.

“We do owe our pledge and our oath, as we take it in the U.S. Senate, to the Constitution,” Ms. Ayotte said.

Former Virginia Rep. Tom Davis, a moderate Republican and former head of the Republicans’ House election committee, said pledges can rob political leaders of the flexibility they need in office. “These pledges are not necessarily good governance tools,” he said. “These are not helping. These are limiting.”

But flexibility is exactly what many pledge-backers want to eliminate. “If you don’t want to sign a pledge,” Mr. DeMint said in an interview, “it means you want some wiggle room.”

Mitt Romney, the former Massachusetts governor who leads the GOP presidential field in most polls, has said he supports Mr. Norquist’s pledge against tax increases and the FreedomWorks-backed “Cut, Cap and Balance” pledge. Signers of that pledge vow to oppose any increase in the debt limit without “substantial” cuts in federal spending, a cap on federal spending and a balanced budget amendment to the Constitution.

But Mr. Romney declined to sign the Susan B. Anthony List’s antiabortion pledge, saying it could have the unintended effect of eliminating federal dollars for some veterans hospitals.

The antiabortion group questioned his rationale, saying it suggested that Mr. Romney “wants the freedom to nominate pro-abortion candidates for key cabinet positions.”

GOP candidate Herman Cain also declined to sign the pledge, while Ms. Bachmann, Newt Gingrich, Tim Pawlenty and others have signed, according to the group.

Mr. Vander Plaats’s “Marriage Vow” asks signers to agree to 14 policy positions aimed at supporting traditional, heterosexual marriage. They must commit to marital fidelity in their own lives, to oppose the federal recognition of gay marriage, and to fight prostitution, pornography and Sharia law.

Mr. Vander Plaats said he wants the pledges returned by Aug.1 so he can announce who signed, and who didn’t, before the state’s Ames Straw Poll, a landmark on the presidential nominating calendar. “It’s pretty clear cut,” he says. “Why wouldn’t they sign it?”

One pledge asks candidates to do more than commit to a set of principles. The group Strong America Now, led by retired Texas consultant Mike George, requires candidates to vow to eliminate yearly deficits by 2017—and to attend two days of training on a business-management strategy to reduce waste, known as Lean Six Sigma.

Among the candidates signing that pledge are Messrs. Pawlenty, Cain and Gingrich.

Write to Danny Yadron at danny.yadron@wsj.com

By CAROL E. LEE, JANET HOOK and NAFTALI BENDAVID

President Barack Obama and congressional leaders agreed Thursday to strive for a blockbuster deficit-reduction deal and will spend the weekend determining whether political support is possible for a sweeping plan to curb entitlements and make major tax-code changes.

Obama said progress was made in a meeting with congressional leaders on how to slash the U.S. deficit and clear the way for raising the federal borrowing limit. Jerry Seib has details from Washington.

The package to reduce the federal deficit by $4 trillion or more over 10 years is much more ambitious than negotiators envisioned just two weeks ago, and represents the most far-reaching of three options Mr. Obama presented to lawmakers Thursday in a closed-door meeting in the White House Cabinet Room.

To achieve such a reduction, negotiators likely would have to agree to spending cuts for domestic programs, defense and entitlement programs such as Medicare and Medicaid, as well as boost tax revenues. Most negotiators agree that spending reductions would outweigh any new revenues by a sizable margin, though significant reductions in tax breaks and deductions for businesses also likely would be part of the mix.

Such a deal would have to overcome many hurdles to pass a divided Congress in time to clear the way for a vote to raise the government’s $14.29 trillion borrowing limit before Aug. 2. Treasury Department officials say that without a higher debt ceiling the government will begin to default on its obligations, including debt payments.

Investors in U.S. Treasurys aren’t betting that a major deal is going to solve the U.S. debt problem in one fell swoop.

Nor do bond buyers appear worried that a deal won’t be reached. While yields—which rise when prices fall—have risen on better-than-expected economic data lately, they still remain low by historical standards. Late Thursday, as stocks jumped, investors pushed down the price of the benchmark 10-year note 15/32 to yield 3.151%.

View Full Image

Reuters

Reps. Pelosi and Boehner and President Obama at the Thursday meeting.

While lawmakers in both parties cheered the idea of a big deficit-reduction deal, they dug in their heels on several key issues. Liberal Democrats are furious that Mr. Obama has opened the door to significant changes to Medicare, Medicaid and Social Security, and many Republicans continue to resist tax increases.

One major proposal under consideration is to alter the way the federal benefits and taxes are adjusted for inflation. Another proposal being discussed would permanently change the alternative minimum tax so it doesn’t hit millions of middle-income Americans.

House Speaker John Boehner (R., Ohio), who met with Mr. Obama and other congressional leaders at the White House Thursday, told his Republican colleagues the parties will know in a matter of days if a large deal is possible and gave the prospects of one a 50-50 chance.

Mr. Obama sounded optimistic about reaching deal, but acknowledged in brief comments to reporters that Democrats and Republicans “are still far apart on a wide range of issues.”

Staff members from the White House and Congress will work on drafting an agreement through Saturday. Mr. Obama will then meet with congressional leaders at the White House Sunday, a meeting that is expected to last most of the afternoon and into the evening.

“At that point, the parties will at least know where each other’s bottom lines are and will hopefully be in a position to then start engaging in the hard bargaining that’s necessary to get a deal done,” Mr. Obama said after Thursday’s White House meeting. “Everybody acknowledged that there’s going to be pain involved politically on all sides.”

The White House needs a deficit reduction agreement to get enough votes in Congress to raise the debt ceiling and avoid default, which leaders from both parties say could trigger another economic recession. Administration officials have said the parties must reach a deal by July 22 to give legislation time to get through the Republican-controlled House and Democratic-led Senate.

Hitting the Ceiling

See what the federal debt limit has been at year-end since 1940.

View Interactive

Until this week, White House officials and congressional leaders had been looking at a deficit reduction package of a roughly $2 trillion over 10 years and were at an impasse over taxes. But the idea of a grand plan that would tackle the sticking points on both sides gained traction last weekend when Messrs. Obama and Boehner met secretly at the White House.

Mr. Obama told lawmakers Thursday he wouldn’t sign any agreement that does not extend the debt ceiling through the 2012 election, people briefed on the meeting said. He then presented lawmakers with three options, these people said: a small deal that would shrink the federal deficit by just over $2 trillion over 10 years that would be accompanied by a vote to raise the debt ceiling through November 2012; a $3 trillion deal; and deal in the range of $4 trillion.

The larger deal could tether entitlement program changes to a broad tax overhaul that would end tax breaks to generate the revenue Democrats want in exchange for lowering individual and corporate rates, which Republicans want.

Most of the eight lawmakers in the room favored the largest option, people familiar with the meeting said, though a few favored the $3 trillion choice. Sen. Jon Kyl (R., Ariz.), and Rep. Eric Cantor (R., Va.) said they would prefer the biggest deficit cut possible but do not think it’s achievable, people familiar with the exchange said.

Mr. Cantor, though, balked at Mr. Obama’s plan to include more than $1 trillion in tax increases, Mr. Cantor’s spokesman, Brad Dayspring, said.

House Minority Leader Nancy Pelosi (D., Calif.) and House Democratic Whip Steny Hoyer (D., Md.) told the president they’re in favor of the biggest deal, but raised House Democrats’ concerns about cuts to Social Security and Medicare, people briefed on the meeting said.

Ms. Pelosi and other Democrats later said they’re open to changes so long as they do not cut benefits—and that they be enacted separately from a deficit deal.

A bigger deal also carries risks for Mr. Boehner. Any openness to tax increases pits the speaker against the conservative wing of his caucus. The speaker assured colleagues he is not giving ground on the GOP pledge to oppose tax increases.

But some of the most conservative GOP members—including freshmen elected in 2010 with tea-party support—may oppose any debt-limit deal even with a $4 trillion deficit-reduction deal attached.

The Republican Study Committee, a large conservative faction in the House, is demanding even deeper spending cuts, strict spending caps, and a constitutional balanced-budget amendment as a condition of raising the debt limit.

—Damian Paletta, John D. McKinnon and Matt Phillips contributed to this article.

Write to Naftali Bendavid at naftali.bendavid@wsj.com

By NICK TIMIRAOS And ALAN ZIBEL

The federal government is readying its first retreat from the mortgage market, with the size of loans eligible for government backing set to decline in October.

As an emergency measure three years ago, Congress raised to as high as $729,750 the maximum loan amount that Fannie Mae, Freddie Mac and federal agencies could guarantee.

That made it easier—and cheaper—for borrowers in pricey housing markets to obtain mortgages, because the government guarantees that investors receive payments on those mortgages even if homeowners default.

Jumbo Declines

Mapping declines in FHA-backed loans by metro areas

View Interactive

• 
  
  Sortable chart: Declines for Fannie, Freddie loans
  
• 
  
  Sortable chart: Declines for FHA loans
  

Now those limits are set to decline modestly in hundreds of counties across the U.S. as the government attempts to reduce its outsized footprint in the mortgage market and create room for private investors to compete. Government-related entities stand behind more than nine of 10 new mortgages, and taxpayers have sunk $138 billion into Fannie and Freddie, underscoring the eagerness to dial down the government’s share.

The new limits will vary widely by location, but will drop to $625,500 in top-tier markets such as New York, Los Angeles and Washington, D.C.

Even though the new limits won’t take effect until Oct. 1, some lenders are already warning borrowers that they will stop accepting applications for loans that exceed the new limits much sooner, to ensure the loans are funded before the cutoff date.

Industry groups are making the case on Capitol Hill that reducing current limits in some of the largest markets is “the exact wrong way to go,” said Jerry Howard, president of the National Association of Home Builders. But Obama administration officials say the limits should fall as scheduled, and Republican lawmakers have introduced measures to shrink the Federal Housing Administration’s reach more aggressively.

Had the lower limits been in place last year, Fannie and Freddie would have backed 50,000 fewer loans, according to the Federal Housing Finance Agency. The bulk of the affected loans —about 60%—are in California, with another 20% in Massachusetts, New York and New Jersey.

Parts of the country with less expensive homes also would be affected; their limits are scheduled to fall as low as $417,000 for Fannie and Freddie loans and as low as $271,050 for FHA loans.

Limits for Fannie and Freddie-eligible mortgages will fall in 250 counties, and FHA limits will drop in about 600 counties. While that is a fraction of the nation’s 3,000 counties, economists at the National Association of Home Builders say those densely populated areas account for 27% and 59% of the nation’s housing stock, respectively.

The possibility of lower loan limits is causing considerable anxiety in coastal California and other high-end housing markets that will serve as test cases for how the government’s withdrawal from housing will affect the market and local economies.

Homeowners whose mortgages are too big to qualify for a government-backed mortgage must seek a so-called jumbo loan, which often carry higher interest rates as well as larger down-payment requirements, sometimes more than 20%.

“Sellers are going to have to reduce their prices if borrowing costs rise,” said Scott Sheldon, a loan officer with First Cal Mortgage in Petaluma, Calif.

One of Mr. Sheldon’s clients, Ed Barr, has been pre-approved for a $662,000 loan backed by the FHA, the largest mortgage the agency can insure in Sonoma County, Calif. He is racing to close a sale before the limit drops to $520,950.

Mr. Barr, who owns a wine-making machinery company, said he has excellent credit but a recent divorce left him with little cash for such a purchase. “I don’t have any other alternative,” the 48-year-old said. Without the loan backed by the FHA, which allows for down payments as low as 3.5%, “the sale won’t happen.”

Scaling back loan limits underscores a broader challenge facing the government: It wants more private players to hold mortgage risk, but it doesn’t want to destabilize fragile housing markets.

Craig Van Sant is looking to pay $500,000 for a home with a $20,000 down payment in Rancho Cucamonga, Calif. Once the FHA limit drops to $335,000, he would need to more than double his down payment. The only upside, he said, is that “home values slide even more, allowing us to buy more house, if we can pull together all the cash.”

Investors and some academics say the government needs to shrink its footprint if private markets are to re-emerge, and that big loans for pricey homes are a reasonable place to start. “Credit unions, small banks, and hedge funds are all eager to buy these loans,” said Brian Brady, a mortgage banker at World Wide Credit Corp. in San Diego.

For now, interest rates for jumbo loans are relatively low, which could cushion the impact of changing loan limits. Rates on 30-year fixed-rate jumbos averaged 5.07% last week, compared with 4.62% on government-backed loans, according to financial publisher HSH Associates. The jumbo rates are near the lowest mark since HSH began its count in 1986, and the spread is the lowest since mortgage markets seized up four years ago.

But rates are only part of the equation. Because jumbos aren’t being securitized, banks must keep them on their balance sheets and are generally requiring larger down payments and stringent income qualifications.”It’ll be a real test of private lenders and their ability to fill the void,” said Mark Zandi, chief economist of Moody’s Analytics.

Write to Nick Timiraos at nick.timiraos@wsj.com

By KEITH JOHNSON

After two months of interrogation aboard a U.S. Navy ship, an alleged Somali militant was indicted Tuesday in New York and charged with supporting terrorists in Somalia and Yemen.

Ahmed Abdulkadir Warsame, who was captured by U.S. forces in the Persian Gulf in April, faces nine counts. They include providing material support to al Shabaab, a Somali group the U.S. has designated a terrorist organization, and al Qaeda in the Arabian Peninsula, the Yemen-based branch of al Qaeda, considered the network’s most-dangerous affiliate.

The decision to try Mr. Warsame in federal court rather than before a military commission reflects the administration’s desire to avoid sending more detainees to the detention center in Guantanamo Bay, Cuba. The move could spark more tension between the White House and Congress over the best way to prosecute suspected terrorists.

Among the factors that tilted the decision for the administration: Civilian courts typically hand out stiffer sentences for the particular charges Mr. Warsame faces, and offer more leeway for terrorism-related charges than do military commissions, U.S. officials said. If convicted, Mr. Warsame could face a mandatory life sentence.

Criticized by congressional Republicans and abandoned by Democrats, the Obama administration earlier this year dropped plans to move the alleged Sept. 11 conspirators to New York for trial in federal court.

But Attorney General Eric Holder, citing the Justice Department’s nearly unbroken string of convictions, has said civilian courts remain the preferred venue for terrorism prosecutions.

The administration’s decision drew immediate flak. “As an active member of two terrorist groups that have planned attacks against Americans and our allies, Warsame should be treated as an enemy combatant and tried in a military commission at the Guantanamo Bay detention facility, where classified information and the public can be fully protected,” said Sen. Kelly Ayotte, a New Hampshire Republican.

U.S. officials described Mr. Warsame, believed to be in his mid-20s, as a mid-level al Shabaab militant, but he was considered particularly valuable to the U.S. intelligence community because of his alleged role as a conduit between the Somali group and al Qaeda in Yemen. That’s one of the clearest indications yet of the deepening relationship between the two terror organizations.

After he was captured while traveling by boat from Somalia to Yemen, Mr. Warsame was held aboard a U.S. Navy vessel at sea in the Gulf region. Onboard, he was questioned for by the High-Value Interrogation Group, which is led by the Federal Bureau of Investigation and includes specialists from the Central Intelligence Agency and Defense Intelligence Agency, an administration official said. He was not read his Miranda rights during that period.

After the intelligence interviews concluded, Mr. Warsame was advised of his Miranda rights and a separate FBI “clean team” re-interviewed Mr. Warsame for evidence that could to be used in a possible trial, officials said. A senior law-enforcement official said Mr. Warsame waived his right to remain silent and continued to talk.

“The intelligence obtained from these interrogations has been used to give us a better understanding of what we’re facing in Yemen from al Qaeda,” a senior administration official said. Mr. Warsame “was uniquely positioned to provide us with important insights into the inner workings of AQAP and al Shabaab and the growing relationship between the two organizations.”

According to the indictment, Mr. Warsame fought for al Shabaab in Somalia in 2009, and provided money, equipment, and personnel to the group over the next two years.

He also received explosives and “military-type” training from al Qaeda in Yemen in 2010 and 2011 and is charged with teaching explosives-making. He is also charged with brokering a weapons deal with al Qaeda on behalf of al Shabaab.

Terrorism analysts have long been concerned about potential cooperation between al Qaeda and al Shabaab, given the geographical proximity between Somalia and Yemen across the Gulf of Aden and the weak central governments in both countries. However, only last year did al Shabaab carry out its first international attack, a bombing in Uganda.

Al Qaeda’s “presence within al Shabaab is increasingly leading that group to pose a regional threat,” concluded the White House counterterrorism strategy, released in late June.

—Evan Perez, Jess Bravin and Adam Entous contributed to this article.

BY ASHBY JONES

Emboldened by their booming population, Hispanics are pushing for a bigger swath of the legislative map that will shape Congress for years to come—and running up against the peculiar politics of redistricting.

Latinos are out to change the once-a-decade redrawing of the map to boost their voting power as immigration, education, unemployment and other issues they care about rise to the top of the national agenda.

But redistricting plans in Texas, Illinois and California—which together will control nearly one-quarter of the seats in the House of Representatives starting after the 2012 election—are vexing many Hispanic interest groups. They say none …

By NEIL KING JR.

SOUTH ST. PAUL, Minn.—Former Minnesota Gov. Tim Pawlenty brings a biographical peculiarity to his quest for the White House. Were he to win, he’d be the first president who had never lived outside his home state.

Former Minnesota Gov. Tim Pawlenty is vying to become the next Republican president. But his hometown of South St. Paul, a working-class enclave with strong Democratic roots, has mixed feelings about its favorite son. WSJ’s Neil King reports.

In fact, Mr. Pawlenty has lived his entire life within a radius of 20 miles, a stark contrast to his more peripatetic Republican rivals and the current president. On the stump, Mr. Pawlenty uses that as a prime selling point. He is the working-class everyman, the son of a truck driver from a hardscrabble town who can win over swing voters in pivotal industrial states.

He can connect, he told a small crowd in New Hampshire recently, “because I have walked in their shoes.” He contends that the GOP has to become more blue-collar—”the party of Sam’s Club, not just the country club,” referring to the membership-warehouse retailer where he often shops near his home.

It is a narrative that, thus far at least, isn’t resonating. In Iowa, where Mr. Pawlenty has campaigned steadily for nearly a year, likely Republican voters put him sixth among a field of eight GOP contenders in a recent Des Moines Register poll, giving him just 6% support. His fund raising has been lackluster.

Far from scrapping his message, Mr. Pawlenty, 50 years old, plans to double down on this homespun narrative in a burst of campaigning starting Wednesday in Iowa. Mr. Pawlenty insists there is still plenty of time to gain momentum among voters as they get to know him better.

“I am not overly worried or panicked in any sense,” said Mr. Pawlenty in an interview Tuesday. “We start from a lower point than the people who are better known or ran last time. I’m confident this steady approach will begin to pay dividends, particularly as we get into the fall and winter.”

Close to Home

Presidential-hopeful Tim Pawlenty has spent his entire life living in the Minneapolis-St. Paul area.

View Interactive

He got a boost Tuesday, on the eve of his five-day swing through Iowa, with the announcement that Sarah Huckabee Sanders, daughter of former Arkansas Gov. Mike Huckabee, will take over Mr. Pawlenty’s grassroots organizing in advance of the closely watched Ames straw poll in August. She helped orchestrate her father’s upset victory in Iowa in 2008. How Mr. Pawlenty performs this summer could determine whether he will be a contender when the first votes are cast this winter.

It still is early in the Republican nominating cycle and the contest remains unsettled. Mitt Romney leads in national polls, but many Republicans consider him vulnerable, in part because conservatives have objected to a health-care plan he pushed through as governor of Massachusetts. Other contenders who have momentum, such as Congresswoman Michele Bachmann and former corporate executive Herman Cain, could falter.

Mr. Pawlenty’s early struggles are emerging as one of the big mysteries of the early 2012 campaign. He entered the race with a top pedigree: a conservative governor who tamed spending in a liberal state and came just shy of being picked as Sen. John McCain’s running mate in 2008. Many Republicans predicted months ago he’d be a prime challenger to Mr. Romney.

Journal Community

“It has been strange to watch,” said Doug Gross, who directed Mr. Romney’s 2008 bid in Iowa but remains unaligned this year. “Pawlenty has had the field basically all to himself in Iowa for months, but he’s just not catching fire.”

His biggest nemesis in Iowa now could turn out to be fellow Minnesotan Ms. Bachmann, a three-term congresswoman and Iowa native whose campaign appears to be the polar opposite of Mr. Pawlenty’s. While he is plodding, hyperorganized and prefers making policy speeches—he has given two major ones in the past month—Ms. Bachmann has surged in the polls on the strength of her feisty TV appearances and a firm debate showing in New Hampshire.

Top Republicans in Iowa say her attacks on abortion and gay marriage, and her barbed criticisms of President Barack Obama, resonate more among Iowa’s social conservatives than Mr. Pawlenty’s message of lower taxes and less regulation.

On the List for 2012?

Read about the potential Republican presidential contenders.

View Interactive

• 
  
  More photos and interactive graphics
  
  

Ms. Bachmann will also trumpet her Iowa roots. For months she has regaled audiences in the state with stories of how her ancestors “felled the trees and plowed the prairies” to tame the state in the 1850s. “Everything I needed to know I learned in Iowa,” she told a crowd recently in her native town of Waterloo.

Even before she launched her campaign, the Des Moines Register poll had her neck and neck in Iowa with Mr. Romney. She had nearly four times as much support as Mr. Pawlenty.

Mr. Pawlenty plans to crisscross the state in the weeks ahead, hammering home his record as governor, his pledge to cuts taxes, and his claim to be the candidate best suited to appeal to hard-hit voters in key states such as Ohio, Pennsylvania and Michigan.

He has sought to turn his everyman image—some call it blandness—into a virtue, saying these are serious times. “The country doesn’t need an entertainer in chief, a comedian in chief,” he told voters in New Hampshire.

His spokesman, Alex Conant, says the governor’s pitch is typical for this phase of the campaign. “He started with very few people outside of Minnesota knowing him or his accomplishments,” says Mr. Conant. “So when he is still introducing himself to the country, it makes sense to spend a lot of time talking about where he comes from and what he values.”

Mr. Pawlenty’s proffer to voters is unusual in modern politics, especially for a conservative. Democrats Bill Clinton, and before him Jimmy Carter, stand out as candidates rooted to one place. Mr. Obama, born in Hawaii to a Kenyan father and Kansan mother, made Chicago his political home. Republican candidates have tended to have national experience or a broader geographic base than Mr. Pawlenty, and few tout working-class roots.

The Michigan-born Mr. Romney governed in Massachusetts but now splits his time between southern California and a lake house in New Hampshire. Newt Gingrich, Jon Huntsman and Rick Santorum live in or around Washington, far from their respective states of Georgia, Utah and Pennsylvania. Former Alaska Gov. Sarah Palin, still eyeing a 2012 run, just bought a house in Arizona.

Mr. Pawlenty has worked to carve out a niche as a working-class Republican for most of the past decade. He coined the term “Sam’s Club Republican” in 2002, when he ran an uphill fight to become the Republican nominee for governor against a little-known but affluent Minneapolis businessman, Brian Sullivan—the target of his Sam’s Club versus country club barb.

Mr. Sullivan went on to serve six years as Minnesota’s committeeman on the Republican National Committee. He supported Mr. Pawlenty’s gubernatorial campaigns. But he still is a bit prickly about the 2002 contest.

“His whole class-warfare shtick was all a response to my candidacy,” Mr. Sullivan says. “When he had trouble articulating his conservative message, he fell back on his upbringing, his whole story of being the son of a truck driver.”

As governor, Mr. Pawlenty worked hard to reach beyond Minnesota. He took five trips over eight years to Afghanistan and Iraq, a fact he repeats often on the campaign trail. A list provided by his campaign of his foreign trips notes he attended “the invitation-only Munich Security Conference” in 2008 alongside Sen. McCain, a trip he repeated the following year.

The campaign touchstone, nonetheless, remains South St. Paul, a largely Democratic town of 20,000 just across the Mississippi from St. Paul. It has a Dairy Queen downtown and a half-empty tech park where slaughterhouses once stood.

Mr. Pawlenty grew up with his four siblings in a three-bedroom, one-bathroom house, where he lived almost until the day he got married. He worked for eight years in the produce section of the local grocery store two blocks away. South St. Paul High School, where he played hockey and soccer, sits six blocks to the north.

Until the slaughterhouses began shutting down in the early 1970s, St. South Paul was known for its stench. “The city had a stigma because of that smell, but we were all so used to it that we hardly noticed it most days,” Mr. Pawlenty wrote in his recent memoir, “Courage to Stand.”

View Full Image

Getty Images

Former Minnesota Governor Tim Pawlenty, above, in West Des Moines, Iowa, in January, speaks often about his blue-collar South St. Paul roots.

His mom died when he was 16. Around the same time, his father was briefly out of work.

“When you grow up as I did,” he said recently on NBC’s “Meet the Press,” “you learn some things and you see some things…So when people hear that, it just gives you a chance to have some credibility with them so they don’t just think you’re some pinhead.”

Mr. Pawlenty’s electoral record in Minnesota shows his difficulties maintaining the support of blue-collar voters. He won South St. Paul handily when he first ran for governor in 2002, despite garnering just 44% of the vote statewide in a tough three-way race. But voter sentiment soured during his first term, and in 2006 he got only 42% support in his hometown. He won that election by less than one percentage point.

Exit polls show he got just 8% support from Democrats in the 2006 election and split the independent vote with the losing Democratic candidate. His appeal was strongest among well-to-do college-goers, not the working-class voters his campaign says he now hopes to reach. Recent polls suggest it would be hard for him to beat Mr. Obama in Minnesota.

Mr. Pawlenty’s policies as governor had a big impact on South St. Paul. Elected on a “no-new-taxes” pledge, the governor moved to tame a large budget deficit he inherited by slashing funding to towns and cities.

By 2005, the town had lost nearly half its expected state allotments, a sum that typically covered about a third of the city’s expenditures. To fill the gap, the city raised property taxes and imposed fees to pay for street lights and other services, a trend that played out statewide. Voters agreed to higher education levies to help the local schools.

“Pawlenty pushed to cut local government aid to make ends meet, and towns like ours had to cut spending and raise taxes to make up for it,” said Joshua Feldman, South St. Paul’s finance director, a nonpartisan post.

South St. Paul is a tough town to impress. A visitor can scour its parks and squares and find no mention of Mr. Pawlenty or the two other governors who sprang from the same streets. One of them, Harold Stassen, fell short in eight attempts for the Republican presidential nomination, nearly knocking off Thomas Dewey in 1948.

Friends and family joke about Mr. Pawlenty’s current shaky standing among the people he grew up with. Dan Pawlenty, one of his four older siblings and a public-works engineer in a neighboring suburb, says his kid brother always stood out for “his sheer drive, desire and determination.” But still, he says, the locals find it hard to believe his brother is gunning for the White House.

“To have a working-class guy who grew up here and worked hard now running for president, for many, it’s just ridiculous,” he says.

Others here question whether Mr. Pawlenty has the juice to go all the way. For every ounce of pride that he’s running for the White House, there’s an equal measure of doubt.

“Of course anybody can put his name in the ring, but does he have a legitimate chance? I’m not sure,” said Doug Woog, a legendary Minnesota hockey coach who was Mr. Pawlenty’s high-school coach and guidance counselor, and usually votes Republican. Mr. Woog, who backed Mr. Pawlenty for governor, emphasizes that he genuinely likes his former player. “He just seems to me to be too local.”

Mr. Pawlenty says he isn’t surprised to hear that his bid for the White House is stirring mixed views in his home town. “I don’t hold it out as the place that is the bellwether for my politics,” he says. “I’m just saying it should help inform people about who I am and where I come from.”

Write to Neil King Jr. at neil.king@wsj.com

By CAROL E. LEE And JANET HOOK

President Barack Obama called a budget-deficit summit Thursday at the White House, suggesting he and congressional leaders are moving closer to a deal that would clear the way for a vote to raise the government’s borrowing limit and avoid default.

WSJ’s Carol Lee reports on movement toward a deal that would allow the government to raise the country’s debt limit. Photo: AP Photo/Charles Dharapak

Mr. Obama, speaking at the White House on Tuesday, said he and congressional leaders in both parties made progress over the July 4th weekend. “But I don’t want to fool anybody: We still have to work through some real differences,” he said.

While an agreement remains elusive, the White House and Republican officials have made significant progress in recent days in identifying a package of spending cuts to be part of a deal, according to Democratic officials. The package includes more than $100 billion in savings from Medicare over 10 years and close to $100 billion in Medicaid savings, Democratic officials said. But Republicans said they haven’t agreed to any figures, and Democrats say they won’t agree to a deal that doesn’t include tax increases.

Mr. Obama met with House Speaker John Boehner (R., Ohio) at the White House on Sunday and spoke with House Democratic Leader Nancy Pelosi over the weekend to try to move the parties closer to agreement, people familiar with the talks said.

On Tuesday, the president renewed Democrats’ demand that tax increases—targeted at corporate jet owners, oil and gas companies and Americans making more than $250,000 a year—be included in a deficit-reduction deal. But Mr. Boehner rejected that idea.

“The legislation the president has asked for—which would increase taxes on small businesses and destroy more American jobs—cannot pass the House, as I have stated repeatedly,” Mr. Boehner said in a statement.

Mr. Obama set a deadline of reaching a deal within the next two weeks, leaving enough time to complete legislative action and pass a bill before Aug. 2, when the Treasury Department has said the government will begin defaulting on its obligations if Congress doesn’t vote to increase the borrowing limit.

Mr. Obama rejected a possible temporary debt-limit increase, as some Republicans, including Senate Minority Leader Mitch McConnell (R., Ky.), have suggested. “This should not come down to the last second,” Mr. Obama said.

The president’s tone toward Republicans was more conciliatory on Tuesday than it was during a news conference last week, when he chided Republicans for defending tax breaks for the wealthy and suggested his own children had better work habits than members of Congress. Instead, Mr. Obama on Tuesday said, “We’ve made progress, and I believe that greater progress is within sight.” He said he called Thursday’s meeting “so we can build on the work that’s already been done and drive towards a final agreement.”

Partisan jockeying continued Tuesday on Capitol Hill as Republicans derailed debate on a resolution authorizing the U.S. to participate in military activities in Libya, prompting Senate Majority Leader Harry Reid (D., Nev.) to open debate on a symbolic measure reinforcing Democrats’ demand that a deficit-reduction deal include tax increases on the wealthy. The nonbinding resolution calls for people earning more than $1 million a year to “make a meaningful contribution” to any deficit deal.

Mr. McConnell called on Mr. Obama to “listen to Republicans and hear firsthand why we think raising taxes in a weak economy is a bad idea and what the realities are over here.”

“He needs to understand the principle at stake here from our point of view,” Mr. McConnell said in a speech Tuesday.

The two sides have identified between $1 trillion and $2 trillion in spending cuts during talks led by Vice President Joe Biden, people familiar with the negotiations said. But those talks broke down two weeks ago when the Democrats proposed roughly $400 billion in tax increases, prompting Republicans to walk out.

Those invited to Thursday’s summit include Messrs. Reid, Boehner and McConnell, Ms. Pelosi, Reps. Eric Cantor (R., Va.) and Steny Hoyer (D., Md.), and Sens. Jon Kyl (R., Ariz.) and Dick Durbin (D., Ill.).

—Jared A. Favole and Damian Paletta contributed to this article.

By SHARON TERLEP

A Congressional oversight committee has asked a senior Obama administration official to clarify comments from a recent hearing in which he denied making a pro-union statement in 2009 amid the U.S. bailout of the auto industry.

Last month, Ron Bloom, White House advisor and former car czar, testified before a Republican-led panel on the effects of the General Motors Co. bailout. At the hearing, Rep. Dan Burton, a Republican from Indiana, asked Mr. Bloom if he said, during a farewell party for the administration’s autos team, that “I did this all for the unions.”

A book by Mr. Bloom’s predecessor as head of the auto bailout team, Steven Rattner, tells of such a gathering and recalls Mr. Bloom making the remark in a joking manner.

A recent article in The Detroit News also repeated the comment without citing a source for the information.

In his testimony on June 22, Mr. Bloom repeatedly told the panel he made no such statement.

In a letter sent Wednesday, Rep. Darrell Issa, chairman of the Oversight and Government Reform Committee, asked Mr. Bloom the clarify the situation.

“It appears that either a respected reporter and your former boss in the Obama administration have both given inaccurate accounts of your comments to the public, or your testimony was not completely truthful,” Mr. Issa said in the letter, a copy of which was provided to the Wall Street Journal.

“If you would like to amend or clarify your testimony for the record, we encourage you to do so as soon as possible,” the letter added.

Mr. Bloom did not return phone calls seeking comment Wednesday evening.

Write to Sharon Terlep at sharon.terlep@wsj.com

By ELIZABETH WILLIAMSON

The U.S. and Mexico agreed Wednesday to end a ban of nearly two decades on Mexican trucks entering the U.S.

View Full Image

Bloomberg

A California Highway Patrol inspector checks the undercarriage of a truck near San Diego in January.

The end of the dispute between the U.S. and its third-largest trading partner came about 2½ years after President Barack Obama killed a Bush administration program to ease the ban. In response, Mexico levied tariffs applied to about $2.4 billion of U.S. goods a year.

The ban, supported by Democrats in Congress and the International Brotherhood of Teamsters, was ruled a violation of the North American Free Trade Agreement.

Under Wednesday’s agreement, half of the tariffs on 99 U.S. products, from Christmas trees to pet supplies, will be suspended immediately. The levies ranged from 5% to 25% of the products’ value. The remaining tariffs will be lifted when the first Mexican hauler complies with a series of U.S. certification requirements, including English-language proficiency and drug and safety tests.

Mexican trucks will have to carry electronic recorders to ensure they do only cross-border, not domestic, runs and to track compliance with U.S. hours-of-service laws. The requirements are tougher than those established by Nafta and somewhat tougher than those now in force for American truckers. Mexican officials said the first truck could be certified as soon as August.

The Obama administration is looking to international trade to boost the still-sluggish economy. It has pursued a number of trade-rules enforcement cases, moved to settle longstanding disputes with major trading partners and is pushing for congressional passage of long-stalled trade agreements with South Korea, Colombia and Panama. Mr. Obama has said he wants to double the value of U.S. exports by the end of 2014.

“The agreements signed today are a win for roadway safety, and they are a win for trade,” Transportation Secretary Ray LaHood said in a statement.

The agreement “is a new path to the clear compliance of obligations of the United States under the North American Free Trade Agreement in the area of cross-border cargo transportation that will bring direct benefits to producers, exporters, consumers and operators of cargo transport,” a Mexican Economy Ministry statement read.

View Full Image

Bloomberg News

A U.S. customs officer directs trucks entering the U.S. from Mexico through the Otay Mesa Port of Entry in San Diego.

Teamsters General President Jim Hoffa condemned the agreement, saying it “lowers wages and robs jobs from hardworking American truck drivers and warehouse workers.” He questioned the U.S. Department of Transportation’s legal authority to end the ban.

The Owner-Operator Independent Drivers’ Association, which represents small truckers, also slammed the agreement. “People in Washington are constantly talking about two things these days—creating good jobs for Americans and cutting wasteful spending. This program does exactly the opposite for both,” said Todd Spencer, the organization’s executive vice president.

Business groups welcomed the pact, saying it was important to advancing U.S. trade policy more broadly.

“We need to press other countries hard to live up to their agreements, but we cannot expect them to comply if we don’t. Resolution of the trucking dispute and removal of retaliatory tariffs is a very positive development,” Doug Goudie, director of international trade policy at the National Association of Manufacturers, said in a statement.

Write to Elizabeth Williamson at elizabeth.williamson@wsj.com

BY SHARON TERLEP AND MIKE RAMSEY

Achtung, fans of German high performance cars: your gas-guzzling rides may get harder to come by.

Future U.S. government fuel economy regulations could saddle auto makers with steep fines or even bar the sale of certain models. Violations of proposed government standards could cost auto makers up to $25,000 a vehicle beginning in 2016, up from current levels of $5 to hundreds of dollars per vehicle.

Fleet economy standards have been in place for decades, but traditionally have assessed only nominal fines to auto makers whose cars burn more gas than the law allows. The Obama administration wants to toughen …

BY NAFTALI BENDAVID, JANET HOOK AND CAROL E. LEE

WASHINGTON—President Barack Obama and House Speaker John Boehner have upped the ante ahead of a high-profile summit on deficit reduction Thursday, suggesting in talks that they might tackle longtime taboos, including tax increases and Social Security changes.

In a sign that both sides see the opportunity for a fundamental revamp of the U.S. budget, Messrs. Obama and Boehner have recently discussed an option that includes tying a deficit package to a broad tax overhaul, people familiar with the talks say. That overhaul would raise revenue by ending some tax breaks, in exchange for lowering individual and corporate rates.

Discussions also …

By LESLIE EATON And KRIS MAHER

Forty-six states began a new fiscal year Friday after lawmakers spent the spring hashing out budgets that largely avoid big tax increases in favor of budget cuts and curbs on pay and benefits for public employees.

While budget woes continued to dominate statehouses, issues such as abortion, immigration and voter identification also drove legislative action. And lawmakers continued to wrestle with soaring state obligations to help fund Medicaid, which pays for health care for low-income Americans.

State Control

View Interactive

See which party controls each state’s legislature and governor’s seat, and has overall state control.

• 
  
  More photos and interactive graphics
  
  

Political winds have shifted sharply in statehouses in the wake of the 2010 election. Republicans now control 25 legislatures, the most in at least five decades. Democrats prevail in 16, down from 27 in 2009, the last time all states tackled their budgets. Nineteen states do so every two years, not annually, according to the National Conference of State Legislatures.

Whichever party held control this year, fiscal pragmatism usually dominated. On-time budgets were turned by perennial foot-draggers Pennsylvania, controlled by Republicans, and New York, where power is split but Democratic Gov. Andrew Cuomo holds great sway. Democrat-controlled California also made its budget deadline, not without drama but without issuing IOUs, as it did in 2009.

That year, eight states failed to enact budgets on time, as legislatures and governors wrestled with plunging tax revenue because of the recession. Many states made steep spending cuts then, but many also raised taxes.

“Two years ago there was a historic increase in taxes,” said Susan K. Urahn, managing director of the nonpartisan Pew Center on the States. “This year it was, what can we cut and how deeply do we cut—a pretty significant shift.”

View Full Image

Reuters

Protesters at the Wisconsin Capitol in Madison in June, as the State Assembly took up the budget bill proposed by Gov. Scott Walker.

The change reflects the new political mood across much of the country, including the rise of the tea-party movement, as well as budget writers’ worries that tax increases might dent job growth and make some states less attractive for employers. Another factor, experts say, is that it has become clear that the economy—and thus, tax collections—aren’t snapping back to prerecession levels.

More than half of states considered legislation to try to rein in long-term liabilities such as employee pensions and benefits. Much attention was focused on Wisconsin and Ohio, where newly elected GOP governors backed successful efforts to strip many public unions of their ability to negotiate future benefits. But labor cost cuts occurred across the U.S., and experts expect more in the new fiscal year.

States sometimes went their own ways, prompting national headlines, as when New York legalized gay marriage. Illinois eliminated the death penalty, and California mandated that renewable energy provide a third of electricity in the state by 2020.

“Creating jobs and balancing budgets are top priorities for state legislatures across the country,” William T. Pound, executive director of the NCSL, wrote in an email. But, he added, “state legislators are focused on the issues unique to the people and conditions of their states, which is exactly what state governments are designed to do.”

BUDGETS AND TAXES

States went into this budget season facing a combined shortfall of $86 billion, according to the National Conference of State Legislatures. That was despite the fact that tax collections have been climbing for more than a year, reflecting the improving economy as well as about $30 billion of tax increases states enacted in 2009 and 2010.

This year, states didn’t enact broad-based tax increases, with exceptions including Democratic strongholds Illinois and Connecticut. Most even avoided hitting residents with big new fees. A few, such as Michigan, cut business taxes in an effort to improve job growth. New York and Maryland allowed income-tax surcharges on the wealthy to expire.

Among the factors fueling the budget gap: States faced the end of about $66 billion in federal stimulus aid. Moreover, their share of Medicaid costs is expected to rise by almost $16 billion this fiscal year, according to the National Association of State Budget Officers.

So while overall state spending is expected to edge up in the new fiscal year, cuts have continued. The reductions have been widespread, affecting tiny town paving projects in New Mexico and highway-construction projects in Missouri, college campuses in Colorado and courthouses in California.

Most states enacted balanced budgets, though some—including Texas and California—used assumptions analysts said were optimistic at best.

One state, Minnesota, didn’t make its deadline at all. The government there shut down at 12:01 a.m. Friday, after the Democratic governor and Republican lawmakers couldn’t reach a budget deal. Talks continued Wednesday.

—Leslie Eaton, Vauhini Vara and Amy Merrick

WORKERS

State and local governments shed 100,000 workers between January and May of this year, and have cut a total of roughly 350,000, or 1.8% of such workers, since the start of 2010, according to the federal Labor Department.

Fifteen states plan layoffs for the fiscal year that began July 1, while 11 plan salary reductions, according to a survey by the National Association of State Budget Officers.

Sweeping laws passed this spring in Wisconsin and Ohio increased contributions to pension and health plans for more than a half-million public employees combined, and stripped most public unions of the ability to negotiate those benefits in the future. In both cases, Republican governors pushed the bills, over objections from Democrats and unions, as a way to help bridge budget gaps.

In states such as New York, Democratic governors hammered out concessions at the bargaining table with unions.

Some form of labor cost-cutting was felt in nearly every state. New Jersey increased the retirement age for newly hired teachers to 65 from 60, and will require 30 years of service instead of 25 for early retirement.

It costs about $12.44 more per hour to employ a state or local government worker compared with a private sector employee, according to Labor Department statistics. Employers spent $40.54 per hour worked for state and local government workers in the first quarter compared with $28.10 per hour for those with private industry jobs. Most of the difference comes from governments’ higher costs for benefits.

—Kris Maher

MEDICAID

Medicaid has been a particularly sore spot for state budgets recently. The population covered by the program for low-income Americans has continued to expand, crossing the 50 million threshold for the first time in 2010, according to the nonpartisan Kaiser Family Foundation. Extra financial support for the program from the federal stimulus stopped after June 30.

“It was a very hard year for budget planning because of the end of the stimulus bump,” said Alan Weil, executive director of the National Academy for State Health Policy, a nonpartisan research organization. The health-overhaul law generally forbids states from reducing the populations they cover, and states are required to provide certain benefits under federal law.

That has left state budget-cutters to go after areas where they have some control: payments to health-care providers and types of care not mandated by federal law, including certain dental benefits, according to the National Conference of State Legislatures. Some expanded the role of managed-care contractors.

California eliminated adult day-care coverage that provided certain medical services to people with physical or mental disabilities. It also limited doctor visits for all beneficiaries to seven a year, unless they get special certifications. It also enacted a 10% reduction in payments to doctors and most other providers. That cut and the doctor-visit cap require federal approval to take effect.

A number of states are also attempting new modes of payment or benefit design in Medicaid, such as “medical homes” that emphasize primary care.

—Anna Wilde Mathews

EDUCATION

Lawmakers in statehouses nationwide cut education spending, expanded voucher and charter school programs and broadened access to online courses.

But the most substantial changes focused on teachers—how they are evaluated, compensated and allowed to bargain. Lawmakers in several states, including Wisconsin, Ohio, Indiana and Idaho, enacted laws that significantly restricted educators’ ability to bargain on issues other than wages.

At least five states, including Idaho and Indiana, linked teacher evaluations to student test scores, a move many teacher unions fought. And states such as Illinois and Michigan, passed bills that allow districts to lay off teachers based on performance, rather than seniority.

Florida did away with tenure and instituted merit pay for educators. Michigan lawmakers passed a bill that would make it harder for teachers to earn tenure and easier for schools to fire them.

Gene Wilhoit, executive director of the Council of Chief State School Officers, said the budget crisis has prodded education leaders to reconsider whether spending increases in the early to mid-2000s produced sufficient gains. “This has forced us to say we need to do things differently,” he said. “We’ve added efficiencies and effectiveness as part of the equation.”

Unions saw it differently. “Sadly, there are governors who have exploited a budget crisis that working people never caused to defund public schools, demonize teachers and give tax breaks and budget allocations to their favorite people and causes,” said Randi Weingarten, president of the American Federation of Teachers, the nation’s second-largest teachers union.

—Stephanie Banchero

SOCIAL ISSUES

Social issues came to the fore in some statehouses, especially those where Republicans consolidated control in November and were able to move ahead on longstanding promises, though many measures face court challenges.

Five states followed the lead of Nebraska, which last year passed a law barring abortions after 20 weeks. Six imposed limits on which organizations are eligible for government family-planning funds, including North Carolina.

That state also was among those, including Texas, Florida and Indiana, approving laws requiring sonograms for pregnant women seeking abortions.

Immigration also played a major role in legislative sessions. A number of states barred illegal immigrants from receiving public benefits. Utah passed a broad package of immigration-related bills, while Georgia and Alabama both enacted versions of Arizona’s law requiring police to question people they stop or arrest about their immigration status.

Kansas and Wisconsin enacted rules requiring voters to show photo identification to vote, while several others—including Texas, Alabama, South Carolina and Tennessee—toughened their voter-ID laws, according to the National Conference of State Legislatures.

Alabama, where Republicans held the legislature and governor’s mansion for the first time since Reconstruction, moved on immigration, voter identification and abortion.

“We were ready to catch the Republican wave that came through,” said House Majority Leader Micky Hammon, a three-term state representative. “And when we took over, we were prepared and ready to do the will of the people.”

—Leslie Eaton and Ann Zimmerman

By LAURA MECKLER

WASHINGTON—Barack Obama opened a White House “Twitter town hall” meeting by tweeting a question himself, becoming the first American president to issue one of the 140-character-maximum messages.

The Speaker of the United States House of Representatives John Boehner submits a question under his Twitter handle “johnboehner” asking President Obama, “After embarking on a record spending binge that left us deeper in debt, where are the jobs?” (Video: Fox News/Image: Associated Press).

The event was a logical move for a White House that already blogs and shoots its own video, distributing the material through social media sites such as Facebook and Flickr and avoiding the filter of newspaper and TV reporters.

For just over an hour, the president answered questions submitted by the public through Twitter. The questions were selected by Twitter staff, who relied in part on an algorithm that measured which of thousands of proposed questions were most popular.

The event mixed familiar elements with new ones. It was carried live on cable networks, and one query asked of the president was submitted by a member of the old-school media, New York Times columnist Nicholas Kristof.

But it’s not every day that the president takes a question in public posed by the leader of the opposition. Twitter chose a query from House Speaker John Boehner based on its popularity, officials said. “After embarking on a record spending binge that’s left us deeper in debt, where are the jobs?” Mr. Boehner asked in a Twitter message, or tweet.

President Barack Obama answers questions submitted via #AskObama in his first Twitter town hall event. Video courtesy of Fox News.

The president, who spoke his responses, took 3,044 characters (which would have required 22 tweets) to agree with Mr. Boehner that more jobs were needed and to pitch his ideas for new tax breaks and infrastructure investment.

In the spirit of Twitter, which limits the length of messages, Mr. Obama seemed to make an effort to shorten his traditionally long responses. At a Facebook town hall meeting in April, his spoken responses, if translated into Twitter messages, would have averaged 38 tweets. On Tuesday, it was just under 14. A White House communications staffer summarized his spoken answers into written tweets.

Before the town hall, people with varied interests attempted to push their priorities to the top of the heap by posting multiple tweets on the same topic, among them diabetes, marijuana legalization and queries like Mr. Boehner’s, suggesting that the president had failed to create jobs. Twitter said it chose the questions based partly on popularity, as measured by the number of times a question was re-tweeted or replied to.

View Full Image

Associated Press

Obama, accompanied by Twitter co-founder and Executive Chairman Jack Dorsey, left, answers a question posted by Speaker of the House John Boehner.

The questions included issues out of the news, such as tax breaks for companies that hire veterans, and in the news, such as debt negotiations. One user asked if Mr. Obama would raise the nation’s legal borrowing limit by issuing an executive order, rather than waiting for Congress to resolve a deadlock and pass legislation. The writer referred to an interpretation of the 14th amendment that some say gives him such authority.

Mr. Obama’s answer ran to more than 2,000 characters, or about 15 tweets. But he sidestepped the question, saying that Congress should act and make any executive action unnecessary.

—Jared A. Favole contributed to this article.

Write to Laura Meckler at laura.meckler@wsj.com

By TOM BARKLEY And KRISTINA PETERSON

House and Senate panels disagreed Thursday on whether to include funding to help U.S. workers hurt by globalization in bills to approve three free-trade agreements, as key lawmakers in both parties sought to salvage a deal to move the pacts forward.

During separate informal debates, a Senate committee maintained its support for a White House-backed proposal to include renewed funding for the Trade Adjustment Assistance program in the pending South Korea trade bill. A Republican-controlled House panel rejected linking the retraining program to the trade pacts with South Korea, Colombia and Panama, which could boost U.S. exports by $13 billion a year.

The Congressional Budget Office has yet to provide an estimate of the cost of extending the retraining program, but congressional aides say it is expected to be less than $1 billion over the course of the three-year extension. Some Republicans view the 50-year-old program as being unaffordable when Washington is grappling with bringing the deficit under control.

An Obama administration official said the White House’s position was that approval of the trade pacts must include renewal of the retraining program. But the administration is open to discussing alternative ideas for pairing votes on them in separate bills, the official said.

House Ways and Means Chairman Dave Camp (R., Mich.) offered a compromise approach along those lines, pledging to consider renewing the retraining program on the same day as the trade agreements if the administration submits them separately.

“I recognize that the White House has said that reaching an agreement on TAA is necessary for it to send the three job-creating free-trade agreements to Congress,” Mr. Camp said. “Therefore, if the administration formally sends up the agreements to Congress without TAA, I intend to formally mark up those agreements and TAA on the same day.”

Mr. Camp said that he supported renewing the retraining program but that it wasn’t appropriate to include it in the trade pacts until there is a consensus among leaders in the House and Senate on the process for moving forward.

In a separate session, Sen. Max Baucus (D., Mont.) said he would be willing to reconsider plans to include retraining funds in the South Korea trade bill. Mr. Baucus said he was open to other options “as long as they provide certainty that the bipartisan trade adjustment assistance deal will be enacted in tandem with the free trade agreements.”

The Senate finance committee rejected a proposal by Sen. Orrin Hatch (R., Utah), its top Republican, that called for removing funding for retraining from the South Korea pact. Mr. Hatch has said he would vote against the measure if it includes retraining funding, and that he believes many other Republicans wouldn’t pass it either.

Thursday’s informal debates amounted to a test run for passing the trade agreements, since any amendments approved in them will be sent to the White House as a suggestion.

The votes, which aren’t binding, provide the last opportunity for congressional input before the trade deals are submitted for an up-or-down vote.

The final decision on how to move forward rests with the White House, under fast-track authority granted when the pacts were negotiated.

Business groups, which have long pushed for passage of the trade agreements and have been generally supportive of the deal to renew funding for the retraining program, urged lawmakers to reach a compromise.

Over 30 trade groups, including the Chamber of Commerce and National Association of Manufacturers, sent a letter to the committees Thursday calling for “the swift approval of the three agreements and resolution of the differences over Trade Adjustment Assistance by both the House and Senate.”

—Elizabeth Williamson contributed to this article.

Write to Tom Barkley at tom.barkley@dowjones.com and Kristina Peterson at kristina.peterson@dowjones.com

By BILL TOMSON And SCOTT KILMAN

Bloomberg

The U.S. requires gasoline retailers to use billions of gallons of corn-based ethanol. Pictured, Missouri farmers harvesting corn last fall for ethanol.

The nation’s $6 billion subsidy program for ethanol producers would be eliminated under a proposed deficit-reduction deal detailed Thursday, but corn-state senators negotiated for more than $600 million to help promote sales of ethanol-blended gas at service stations.

The White House, along with key ethanol-industry supporters, backed the proposal, which was cobbled together by three senators. It still faces an uncertain future in the House as one piece of broader bargaining over federal spending and tax policy.

The proposal would end the decades-old subsidy by July 31. It now gives gasoline retailers an excise tax credit of 45 cents for each gallon of ethanol they blend with their motor fuel. A tax of 54 cents a gallon on imported ethanol would also be retired at the end of the month.

The significance of the ethanol-subsidy program has changed since 2006, when the federal government mandated the petroleum industry to annually buy billions of gallons of biofuels, the vast majority of which is corn-derived ethanol.

The program “became less of a sacred cow,” said Rick Brehm, chief executive officer of Lincolnway Energy, a closely held ethanol producer in Nevada, Iowa. “I think we have all been expecting a reduction” in the tax credit.

A Senate vote last month signaled a majority of that body was ready to end the subsidies.

That vote led ethanol industry supporters Sen. Amy Klobuchar (D., Minn.) and Sen. John Thune (R., S.D.) to negotiate a deal with Sen. Dianne Feinstein (D., Calif.).

Ms. Feinstein’s proposal calls for about $1.33 billion in savings achieved for the rest of the year to be used to reduce the federal deficit. The remainder of the savings, about $668 million, would be used to extend a host of tax credits, including money for alternative-fueling infrastructure such as blender pumps at gas stations that let consumers boost the percentage of ethanol in the fuel they buy.

The White House, in a statement, said the senators’ proposal “provides a road map for the American biofuels industry to navigate their own future expansion.”

The government’s ethanol mandates, which began five years ago and triggered a rapid expansion of the ethanol industry, require gasoline retailers to use 12.6 billion gallons of corn-derived ethanol this year. The mandate grows to 15 billion gallons in 2015 for corn-derived ethanol.

An end to the ethanol tax breaks could sting consumers. About 90% of the gasoline sold in the U.S. contains at least 10% ethanol, indeed the E-10 fuel blend is the most popular at the U.S. pump. Such a move would increase the federal excise tax on the E-10 gasoline by 4.5 cents a gallon.

Ethanol officials said Thursday that ethanol-blended gasoline would probably remain cheaper than conventional gasoline in the Midwest, however, because corn-derived ethanol is currently cheaper to make than petroleum-derived gasoline.

All commercial-scale ethanol in the U.S. is corn-based, but that’s slowly changing. The Energy Department announced Thursday it would help finance the construction of the first U.S. major plant that would make ethanol that is cellulose-based.

An end to the tax on imported ethanol wouldn’t have much impact on domestic prices in the short run because the U.S. is now an ethanol exporter. The U.S. has imported sugar-derived ethanol from Brazil in the past, but Brazilian sugar prices have climbed so high in recent months that Brazil is importing each month tens of millions of gallons of corn-derived ethanol from the U.S.

“While initial imports will be modest, eliminating the ethanol import tariff is an important step towards developing a global market for clean energy and will ultimately benefit both Americans and Brazilians through increased competition and reduced price volatility,” said Leticia Phillips, a spokeswoman for the Brazilian Sugarcane Industry Association, or UNICA.

The loss of the subsidy would be a blow to gasoline companies because they are the ones who received it for blending ethanol, said Joel Karlin, an analyst for Western Milling, but the effect on ethanol companies and corn farmers would be minimal.

Grain traders have been expecting the subsidies to end since last year, but some were surprised by the quick timetable. That helped limit gains in corn prices on Thursday, though prices still rose on strong import demand from China.

In trading at the Chicago Board of Trade Thursday, the corn futures contract for December delivery, the most actively traded contract, settled at $6.155 a bushel, up seven cents a bushel.

“Everybody assumed we’re going to lose [the subsidies] anyway,” said Jim Gerlach, president of A/C Trading in Indiana.

—Siobhan Hughes contributed to this article.

Write to Bill Tomson at bill.tomson@dowjones.com and Scott Kilman at scott.kilman@wsj.com

BY MICHAEL HOWARD SAUL

Assemblyman David Weprin, a former City Council member who hails from a prominent Queens political family, has been selected as the Democrats’ nominee to fill the congressional seat vacated by Anthony Weiner.

The special election to fill the remainder of the congressman’s term will be held Sept. 13. Mr. Weiner resigned last month after admitting he engaged in lewd online exchanges with women.

Republican leaders appear to be split on their nominee, with Brooklyn officials favoring Robert Turner, who unsuccessfully attempted to unseat Mr. Weiner in 2010, and Queens officials leaning toward Juan Reyes, an attorney with ties to former …

By AMY MERRICK

An independent panel created by former U.S. Vice President Walter Mondale and ex-Minnesota Gov. Arne Carlson called for spending cuts and tax increases to end Minnesota’s budget crisis, which stretched into its seventh day Thursday.

State government shut down July 1 after Democratic Gov. Mark Dayton and Republicans who control the legislature were unable to agree on how to close a $5 billion gap in the two-year budget. Mr. Dayton wants to raise income taxes or find other new revenue sources, in part to shore up the state’s health-care budget. Republicans argue that no new revenue is needed.

Mr. Mondale, a Democrat, and Mr. Carlson, a Republican, convened the panel of former state lawmakers and business leaders to present a “third option” that might end the impasse. The two men didn’t participate in the discussions.

On Thursday, the group released a plan that would eliminate 70% of the state’s budget gap through spending cuts and 30% through revenue increases. It advocated permanently cutting $2.2 billion in state spending and saving $1.4 billion by postponing repaying money due to schools.

The panel also suggested increasing state revenue $1.4 billion. Temporarily increasing income-tax liabilities by 4% on all residents would bring in $700 million over three years, the report said. The balance of new revenue would come from higher taxes on cigarettes and alcohol and from a surcharge on hospitals that would raise $250 million.

The group said its proposal would increase state spending by 3% over the two-year period.

By calling for new revenue, which puts the two-year spending plan at $35.6 billion, the group is closer to Mr. Dayton’s position than to the Republican plan. The GOP argues that a $34.2 billion budget should be sufficient.

Even before the report was released, Republicans expressed skepticism. “If tax increases come out of that plan, that’s not going to happen,” Senate Majority Leader Amy Koch told the local TV program “Capitol Report.”

In a statement Thursday, Mr. Dayton said, “Most of the committee’s recommendations parallel my own proposals.”

But the governor continued to argue that income taxes should be raised only on the wealthiest Minnesota residents and said “most other Minnesotans are already overtaxed, due primarily to the 75% increase in property taxes statewide during the previous eight years.”

He called on Republicans to accept one of his offers, adopt the independent panel’s suggestions or propose a new deal.

On Wednesday, Republican lawmakers ridiculed Mr. Dayton’s latest proposals, which presented the choice of raising income taxes on residents earning more than $1 million a year or increasing cigarette taxes by $1 a pack.

Ms. Koch and House Speaker Kurt Zellers sent Mr. Dayton a letter Thursday calling his proposal “incredibly disappointing.”

“We view this as a giant step back from where we were just last week,” said the letter, which also asked for an updated list of the governor’s proposed spending cuts.

Minnesota’s shutdown has furloughed more than 20,000 state workers and closed state parks, highway rest stops and horse-racing tracks. Minnesotans can’t take driver’s tests or buy lottery tickets.

Prisons, courts and the highway patrol have continued to operate, and the state is still issuing food stamps and making emergency road repairs.

Republicans have been pressing for a “lights on” bill to temporarily restart government operations while talks continue. Mr. Dayton has said he is only interested in a broad solution.

Write to Amy Merrick at amy.merrick@wsj.com

BY JANET ADAMY

As the U.S. wrestles with rising health expenses, one group of patients stands out for government-paid care that is both ultra-costly and plagued with problems.

They are the people who receive both Medicare, the program for those 65 and older or disabled, and Medicaid, the one for the poor. Statistics on these 9.7 million “dual eligibles” are stark.

They account for 16% of Medicare’s enrollees, but 27% of its spending. And they make up 15% of Medicaid’s enrollment, but 39% of Medicaid spending, according to the Centers for Medicare and Medicaid Services.

Chronic diseases and heavy use of nursing homes …

On Aug. 2, the U.S. government is due to hit the limit on its borrowing. Lawmakers are scrambling to get a deal in place to raise that limit—but will it happen? And what will it look like?

The Wall Street Journal’s Gerard Baker spoke with Sen. Mark Warner, a Virginia Democrat, and Sen. Saxby Chambliss, a Georgia Republican. Here are edited excerpts of the discussion.

What Are the Prospects?

MR. BAKER:We heard this morning from Treasury Secretary Tim Geithner. He expressed extreme confidence that we will have a deal well in advance of Aug 2. Sen. Warner, do you share that optimism?

SEN. WARNER: Depends on what you call a deal. It’s a very knotty problem.

My biggest concern right now is what an interest-rate spike would do to any incipient recovery. We’ve used monetary policy and fiscal policy already. We’ve run out of bullets.

We might have what appears to be a top-line number that has some meat to it but doesn’t really take on the issue around tax reform, around entitlement reform. While that might get us over an Aug. 2 hurdle, my huge concern is that it might also then take the air out of really addressing this problem.

If we’re not in the neighborhood of north of $4 trillion of debt reduction over the next 10 years, then we really haven’t taken on this problem.

SEN. CHAMBLISS: What concerns me about an Aug. 2 deadline is that you don’t have the time to really try to get entitlement reform or any kind of tax reform. Trying to get all that done between now and an Aug. 2 deadline would be very, very difficult to do.

MR. BAKER:Sen. Warner, for the Democrats, the big issue is going to be any willingness to agree to really significant entitlements reform, by which we mean entitlements cuts. Are you confident that any deal that can be reached before Aug. 2 is going to have meaningful entitlement reform?

Sen. Mark Warner tells businesses the overhaul of the tax system should include the demise of a number of loopholes favorable to the private sector.

SEN. WARNER: We’re spending at an all-time high, 25% of our GDP. We’re collecting revenues at roughly 14.5%. Seventy-year low. It doesn’t take a world-class CFO to realize that delta’s not sustainable. So anybody that sits up here and says this problem is going to be solved on one side of the ledger alone either doesn’t understand accounting 101 or doesn’t understand the extent of the difficult choices we have to make.

MR. BAKER:But would some of your colleagues in the Senate and the House, who are of a more radical hue, be willing to accept significant Medicare cuts?

SEN. WARNER: Any deal that would satisfy either all the Democrats or all the Republicans will not get 60 votes in the Senate.

Raising Revenue

MR. BAKER:The numbers are so large that very few people believe that this is going to be achievable by either revenue increases or spending reductions alone.

So if a deal is done, which involves some kind of tax reform, which involves any significant revenue increases, is that something that can be sold to Republicans in the House and the Senate?

Sen. Saxby Chambliss (R-Georgia) says the government’s revenue of 14.5 percent of GDP is unsustainable and must be increased – without raising taxes – to address the nation’s deficit.

SEN. CHAMBLISS: If any taxes are truly raised in the pure sense, then the answer to your question is no, that’s not going to sell. It won’t sell on the Senate side nor the House side.

You’ve got to approach it from three standpoints. Sure, we’ve got to cut spending. Second, you’ve got to look at entitlement reform. Third, you’ve got to look at revenues.

As Mark said, we’ve got this 10½-point gap that we’ve got to start closing. There’s only one way to do that, and that’s figure out a way to get our revenues up.

We get our revenues up by enticing [CFOs] to get some of that $2.5 trillion off your balance sheet and reinvest it in your company and create jobs, and spread out that tax base by putting people back to work. We do it by energizing the economy, whether it’s through taxes or whether it’s through allowing you to bring some of your money back from offshore.

MR. BAKER:People in business generally want government to get out of the way and let the private sector create jobs. Is this the message you’ve got for them? “We’re going to have to cut some of these tax breaks that you get?”

View Full Image

Paul Morse for The Wall Street Journal

‘You corporate guys can’t be bystanders on this.’ —Mark Warner

SEN. WARNER: The answer is yes. I hear, particularly from some of our Fortune 200 companies, “My gosh, America’s corporate tax rate is the highest in the world.” Of course, any Fortune 200 company that’s actually paying 35%, if you’re the CFO of that company, you’re probably not doing that very good a job. The effective rate is quite different.

I get discouraged when I hear some of my friends say we need to ease the tax burden on businesses, and they point to the situation in other countries. I also get frustrated sometimes when they say, we’re going to invest elsewhere if we don’t get those reductions.

This has to be a time where we’ve all got some skin in the game.

If you look at our tax mix, the share of corporate revenues as a percentage of our overall revenue mix has declined by about half over the last 30 years. So while we do have, in name, the highest rates, as a percentage of total revenues there’s been a substantial decline.

Restoring Faith

MR. BAKER:Is this a moment when Washington can actually perhaps demonstrate to the American people and to the rest of the world that the system can work? That the U.S. does know how to get its house in order?

View Full Image

Paul Morse for The Wall Street Journal

‘Mark and I are the eternal optimists.’ —Saxby Chambliss

SEN. CHAMBLISS: Mark and I are the eternal optimists.

We still think that we’re going to put this puppy to bed with a deal that’s good for America. We’re not there yet, but we’re continuing to work on it.

SEN. WARNER: Every other issue pales if we don’t get this one right. Why would we roll the dice on the American and world economy by punting?

We add $4 billion a day to this debt. It is not self-correcting. Now, we’ve got to have growth. But the greatest thing we could do for growth, and the greatest thing we could do for the American people, is show that we can do what we were hired to do.

If we don’t do it, you should fire us all.

But you corporate guys can’t be bystanders on this. And this cannot be just about the next-quarter shareholder report. You’ve got to have some skin in the game, too.

Few politicians have more influence over taxes and spending than Dave Camp, a Michigan Republican and chairman of the House Ways and Means Committee, which oversees taxes, Social Security, Medicare and Medicaid. He takes a hard line against raising taxes as part of any deficit deal, but says there will have to be compromises with Democrats—and soon. Here are edited excerpts of his exchanges with The Wall Street Journal’s David Wessel.

MR. WESSEL:Are we going to avoid default? Is this going to be the year we get a framework for deficit reduction?

MR. CAMP: We need to because we can’t default. The concern is, if you get close to that date without a deal, what the markets may do.

MR. WESSEL:What will it take for you and the rank and file in the House to feel comfortable?

MR. CAMP: At least the same amount of spending reductions that you see in debt increase. Then structural reforms, too, so we don’t get back into this problem again.

MR. WESSEL:What kind of numbers are we talking about?

MR. CAMP: Well, the only marker that’s been put out there is more than $2 trillion. Because the debt ceiling has to go up $2 trillion. There’s talk of a short-term extension while these discussions continue. I think that’s not a good idea, because it doesn’t give you the certainty. Ideally, you’d like to get that settled, and not have it be continually a hanging-over issue.

Longer Haul

MR. WESSEL: Treasury Secretary Timothy Geithner laid out a framework—I’ve heard [Republican U.S. Rep.] Paul Ryan lay out a similar framework: a down payment now, an agreement on a target, and an understanding that some things can’t be resolved before the 2012 election. So we’ll fill the holes later. Is that how this is likely to work?

The head of the House Ways and Means Committee, Rep. Dave Camp (R-Mich.), says the deficit can be addressed without raises in revenue and by cuts to government spending alone.

MR. CAMP: There’s only so much you can do on the discretionary side. You have to do things that take place over time. And many of those are in the mandatory area. But it will take a series of years to really get to these target numbers. We’re hearing $2 trillion as the sort of overarching number.

MR. WESSEL:But will there be legislative language to tell us where we’ll get $2 trillion of savings over 10 years? Or an agreement to get $2 trillion for the down payment first?

MR. CAMP: You’ll have to have a down payment, but it is a 10-year budget window. That’s how we do it here.

MR. WESSEL:Can we get spending equal to revenues—which is a deficit of about 3% of GDP—by 2015 without increasing taxes?

MR. CAMP: The House-passed budget does that, gets to primary balance…

MR. WESSEL:…And you think the House-passed budget can get through the Senate and be signed by the president?

MR. CAMP: We at least have a proposal and a plan. We don’t see a plan on the other side to do that.

Focus on Growth

MR. WESSEL:Would you rather reach 3% even if it required some revenue increases, or hold the line on revenue and settle for a higher deficit?

MR. CAMP: What we want to do is not have higher revenues. Because the issue is who’s going to pay them. Their idea is always, quote unquote, “rich people over $250,000.” Half of that, as we know, is small business, which is the very sector we need to see some growth in.

MR. WESSEL:But your idea of fundamental tax reform is that you broaden the base, lower the rates, and you end up with the same revenue that we would have under the current law, right?

MR. CAMP:What we want to see is the economic growth. If you add our House budget plus the fundamental tax reform that was in the House budget, independent economists say a million jobs in the first year alone.

MR. WESSEL:At some point, you’re going to have to compromise with the Democrats.

MR. CAMP: We’d like much lower spending than they want. Obviously there’s going to have to be some compromise there.

But the economy is not recovering, we’re not seeing unemployment go down. To raise revenues particularly on those small-business owners, I think is a big mistake.

MR. WESSEL:If you had to raise revenues, where would be the least damaging place to look?

MR. CAMP: I can’t think of a least damaging place. The approach they’re looking at is not just on what they call high income. They also want to sort of pluck out various provisions of the tax code and simply end them, not really with an eye to what this means to our competitiveness in a global economy. That, I think, is a very dangerous prospect.

MR. WESSEL:What tax code would you like?

MR. CAMP: What I’d like to see is how low can we get rates so that we can compete around the world. On the individual side, I’d like to see the same thing. If you do just the business side, you don’t really get at what’s driving our economy, where many people are organizing businesses and filing.

Looming Election

MR. WESSEL:What’s the timetable?

View Full Image

Paul Morse for The Wall Street Journal

‘We at least have a proposal and a plan.’ —Dave Camp

MR. CAMP:The economy is not recovering. The president is facing re-election. I don’t know that he wants to go into 2012 with the narrative of “if we do nothing, taxes will go up,” as was the narrative in 2010. I worked very hard on welfare reform in 1996 and everybody said President Clinton will never sign that. Well, in August of 1996, facing re-election, he did that exact thing.

MR. WESSEL:What are the odds that, before the election, we get meaningful corporate tax reform?

MR. CAMP: Obviously, now it looks like a very long-term project. But you don’t know that for sure.

That’s why I’m not treating it as one. I’m trying to get the committee and business leaders to be engaged.

MR. SEIB:You noted that it’s not, in classic economic terms, a good time to raise taxes. Under Keynesian economics it’s also not a good time to cut spending. Do you think that ought to affect the pace of spending cuts, or do you think we’re learning that Keynesian economics doesn’t work anymore, and that you really can’t spend and grow?

MR. CAMP: Our debt is 100% of our economy. As a member of the debt commission, we had testimony from outside economists that studied 600 years of economic history that says when your debt gets to that level, it impacts your economy’s ability to grow. They estimated about 1% came off our economic growth, which is about a million jobs.

So there’s a direct line that you can connect between debt and job creation. That’s why it’s so essential that we have spending reductions. As we pull out of the public side, the private side then grows. The public debt is hampering the ability of the private economy to grow.

By ARIAN CAMPO-FLORES

MIAMI BEACH—Gov. Rick Scott swept into office in January vowing to lure businesses, create hundreds of thousands of jobs and make Florida a model of limited government.

‪Less than six months later, the Republican governor and the GOP-dominated legislature have achieved much of the conservative agenda he laid out, including deep budget cuts to reduce a $3.6 billion deficit without raising taxes, pension-system changes and privatizing Medicaid.

View Full Image

Getty Images

Florida Gov. Rick Scott.

Yet polls show the former health care executive, who poured more than $70 million of his own money into his campaign, has a 29% approval rating, one of the lowest among governors, a Quinnipiac survey found last month. That’s down from 35% in early February.

Two polls by Republican-leaning groups, War Room Logistics and Viewpoint Florida, show higher support for the governor, with current ratings of 36% and 45%, respectively. A Viewpoint Florida survey in March pegged the governor’s approval at 47%.

Some analysts attribute Mr. Scott’s unpopularity to a combination of policies and governing style. The Quinnipiac survey showed that a majority of voters considered the state budget “unfair,” though state law requires that the budget be balanced, and a plurality of 47% believed the cuts it contained went “too far.”

In an interview at a hotel here, Mr. Scott, 58, said he has no plans to change course on policy matters. “I’ve made a lot of tough decisions, and that’s what I got elected to do,” he said.

But he is shaking up his administration. He accepted the resignation of a top adviser, Mary Anne Carter, who said her departure was planned. And he replaced chief of staff Mike Prendergast, who had little government experience, with Tallahassee insider Stephen MacNamara.

For SCOTT

‘I Don’t Think This Job Is a Popularity Contest.’

Read an edited transcript of the Journal’s interview with Gov. Rick Scott.

Mr. Scott also has stepped up his schedule of radio and TV interviews and appearances before industry groups such as citrus growers and hoteliers.

Mr. Scott’s low rating worries many Republicans, who fear he could damage the party’s chances of winning Florida in the 2012 presidential election. A survey released Friday by Democratic-leaning Public Policy Polling found that 40% of registered voters in the state said Mr. Scott’s actions have made them less inclined to support the GOP presidential nominee in 2012.

“If a year and a half from now Gov. Scott’s approval ratings are still very low … then it’s going to come back and hurt the Republican party,” said GOP state Sen. Mike Fasano, who has clashed repeatedly with Mr. Scott’s administration.

Teachers have protested his reduction of education spending by $1.35 billion —in a $69 billion budget—and a law he signed that ties their pay to student test scores.

Environmentalists have decried Mr. Scott’s overhaul of growth-management policies they say will open the way for unchecked development.

The governor and top GOP lawmakers “focused on the hard-core priorities of a national right-wing agenda,” said Democratic Senate minority leader Nan Rich.

Although Mr. Scott enjoys strong support from tea-party groups, some Republicans are unhappy. In July, the Broward County Police Benevolent Association, which opposes the pension changes, is hosting a “Party to Leave the Party,” aimed at encouraging its GOP members to change their affiliation.

“I’m going to be one of the first ones in line,” said Dick Brickman, the group’s former president and a long-time Republican.

Many say Mr. Scott has done a poor job of explaining how his policies help working people. “He’s not understanding what the average little guy and little gal are having to deal with economically,” said Mr. Fasano.

The governor’s dealings with the legislature have sometimes been strained. When he rejected federal funding for a high-speed rail line between Orlando and Tampa in February, both parties say they were blindsided.

“He had some missteps or growing pains,” said House GOP speaker Dean Cannon.

But “he learned quickly, and overall, I think that most legislators have a higher opinion of him today.”

Mr. Scott said “there’s always somebody who opposes what you’re doing.” But, he added, “I was clear in the campaign what I was going to do … I got elected on those ideas.”

The results are starting to show, he says. Florida added 28,000 jobs from April to May—the largest increase of any state, according to the U.S. Bureau of Labor Statistics.

The unemployment rate, while still higher than the national average, has been slowly dipping, to 10.6% in May. “The state’s getting back to work,” said Mr. Scott, repeating a mantra of his campaign.

Political observers say there’s plenty of time for him to turn things around. Mr. MacNamara, the new chief of staff, is expected to bring more discipline to the administration and help hone the governor’s message.

“You could always explain things better,” said Mr. Scott. “When I sit down with people and explain … this is the reason why I’ve made the choices that I’ve made, they get it.”

By PATRICK O’CONNOR And NEIL KING JR.

Minnesota Rep. Michele Bachmann formally enters the Republican presidential contest Monday amid signs that she is already a leading alternative to national front-runner Mitt Romney, after a poll released over the weekend showed the two running neck-and-neck in Iowa.

Rep. Michele Bachmann defended her credentials as a candidate for the Republican presidential nomination in an appearance on “Fox News Sunday.” Video courtesy of Fox News.

The poll positions Ms. Bachmann in the nation’s first nominating state, and possibly elsewhere, as the top populist, tea-party backed challenger to Mr. Romney, who owes his support, in large part, to the establishment, business-friendly wing of the GOP.

Ms. Bachmann was the first choice of 22% of likely caucus-goers in the Des Moines Register survey, to Mr. Romney’s 23%. Both were well ahead of all other candidates, with Herman Cain, a former corporate CEO, placing third, with 10%. The survey had a margin of error of plus or minus 4.9 percentage points.

Ms. Bachmann’s numbers are lower in national surveys. But the Register poll showed that, at the starting line of her campaign, Ms. Bachmann has already built a strong position in Iowa as a “passion candidate,” thanks to support among social-issue conservatives, her frequent television appearances and her willingness to lock horns with Republican leaders in Washington. The Register said Ms. Bachmann drew support from very conservative Republicans and those who consider themselves tea-party supporters.

Ms. Bachmann was scheduled to hold a campaign event in Waterloo, Iowa—her birthplace—on Sunday night and to begin the official phase of her White House bid with a Monday morning rally. Her three-state announcement tour will also take her to New Hampshire and South Carolina.

On the List for 2012?

Read about the potential Republican presidential contenders.

View Interactive

• 
  
  More photos and interactive graphics
  
  

Bachmann supporters say that, just as she did when competing for the Minnesota state Senate in 2000 and winning her seat in Congress in 2006, she will run for president as an insurgency candidate who relies on the passion of grassroots coalitions.

Iowa Republicans have a record of rewarding that type of campaign and punishing those who rely heavily on organization over emotion. Such was the case in 2008, when a vastly outspent and out-organized Mike Huckabee, the former Arkansas governor, scored an upset win in Iowa over Mr. Romney.

In what could become the mirror opposite of Ms. Bachmann’s approach, former Minnesota Gov. Tim Pawlenty is waging this season’s most meticulous Iowa campaign.

Mr. Pawlenty has been to Iowa more than 15 times in the last year and a half and plans to spend roughly half of July in the state. He has racked up dozens of key endorsements and has the most robust campaign team in Iowa.

And yet Mr. Pawlenty, long seen as a leading contender to rival Mr. Romney in the nomination contest, has shown no signs of traction yet in a state that is crucial to his election prospects. Likely GOP caucus-goers in the Des Moines Register poll put him a distantsixth in the field of eight candidates, giving him just 6% support.

Ms. Bachmann now faces the challenge of building her popularity into votes during the caucuses, which are scheduled to take place in February,

View Full Image

Getty Images

Michele Bachmann talks about jobs on ‘Face the Nation’ on Sunday.

She has the support of state Sen. Kent Sorenson, a popular tea-party figure in the state, and has drawn crowds at her appearances. She has also advertised online. But her supporters haven’t done many of the things necessary to capitalize on the appetite for her presidential bid.

At a recent gathering of conservative activists in Des Moines, Pawlenty aides fanned out across the convention site with clipboards to register supporters for the Ames straw poll in August. Ms. Bachmann wasn’t represented, according to a pair of attendees, even though the event attracted about a thousand likely caucus-goers.

In May, Ms. Bachmann failed to show up at a prominent GOP dinner in Polk County, the state’s largest enclave of voters. Instead, she beamed her speech in from Washington over a Skype connection. The county GOP organization says Ms. Bachmann has agreed to pay the group $10,000 to make up for its losses.

“There has been a lot of excitement about her, but no one [in Iowa] has been organizing that interest and building a ground force to go with it,” said Doug Gross, who managed Mitt Romney’s Iowa campaign in 2008 but is unaligned his year. “She is really slow getting out of the box here.”

“We have great people on the ground in Iowa and are looking forward to building our ground game there,” campaign spokeswoman Alice Stewart said. “Congresswoman Bachmann is announcing in her home state of Iowa and plans to spend quite a bit of time out there, letting Iowans know that she represents their views and values.”

Write to Neil King Jr. at neil.king@wsj.com

BY TOM LAURICELLA

The Federal Reserve is just days away from ending one of the major steps to aid the U.S. economy—but the effort has done little to solve the original problem: The government and individuals alike are still heavily in debt.

Around the globe, the inability of governments and households to reduce their debt continues to cast a shadow over Western economies and the financial health of individuals. Today, U.S. consumers have more mortgage and credit-card debt than they did five years ago, and the U.S. budget deficit is worsening. At the same time, European governments are having to throw billions more …

BY AMY SCHATZ

WASHINGTON—A key U.S. House lawmaker, speaking Thursday at a hearing on the broadband-spectrum proposal of LightSquared Inc., said the Federal Communications Commission shouldn’t approve a service that disrupts or burdens global positioning system devices in the aviation industry.

“In aviation there’s no room for error,” said Rep. Thomas Petri (R., Wisc.), chairman of the House Subcommittee on Aviation. He added that it is important the FCC “does not approve plans that would introduce unacceptable risk into the aviation system or leave aviation GPS users with new, costly burdens.”

Other lawmakers also said they are worried about the proposal. “I’m very …

By AMY SCHATZ

WASHINGTON—House lawmakers passed legislation Thursday to overhaul the U.S. patent system for the first time in nearly 60 years, despite disagreements over patent-office funding and a provision that could help large banks challenge some patents.

The House passed the America Invents Act on a 304-117 vote, a bipartisan tally with more than two-thirds of lawmakers from each party supporting the bill. The bill would change how the U.S. grants patents and award them to the party which is “first to file” an invention instead of the “first to invent” it. The change would bring the U.S. in line with other countries who adopted first to file patent systems years ago, a move that will simplify the patent process for companies that file applications in multiple countries.

Getty Images

The Senate passed similar legislation in March on a 95-to-5 vote. The House and Senate must now negotiate a final bill before patent overhaul can be sent to President Barack Obama to be signed into law.

The bill’s supporters say it will improve patent quality by creating a new process for reviewing patents after they have been issued and allow third parties to provide information on other parties’ applications. In a nod to university concerns, the bill would also give inventors a grace period to file for patents after publicly disclosing their inventions. It would also stop the ability of inventors to receive patents on tax strategies.

“This bill is designed to help all inventors,” said Rep. Lamar Smith (R., Texas), who chairs the House Judiciary Committee and helped author the legislation. The current system “seriously disadvantages small inventors and companies” because it can lead to years of costly legal challenges to their patents, he said.

Congress has been trying to overhaul U.S. patent rules for more than a decade, but previous efforts to reach a compromise on new rules fell apart amid squabbling by various industries, including pharmaceutical and Silicon Valley companies. Many of the most divisive issues have been settled by the courts in recent years, however, leading to the current legislation.

The banking industry scored a victory when lawmakers included a provision in the bill which would make it easier for banks to get re-examination of patents on financial business processes such as check-scanning, in an effort to avoid paying patent-infringement fees. The U.S. Chamber of Commerce and the National Retail Federation joined the banking industry to push for the provision, which was opposed by some small inventors.

An amendment sponsored by six lawmakers to strip that provision from the bill failed. The banking industry measure is also in the Senate version of the bill.

Even though the legislation enjoyed broad industry support and was relatively uncontroversial, the House bill ended up filled with some thorny provisions that riled a few industry groups.

Some inventors and small businesses complained that switching to a “first to file” system would give large companies an advantage and hurt individual inventors. Opponents argued there is no reason to change the U.S. system. “Our patent system is the strongest in the world,” said Rep. James Sensenbrenner (R., Wis.), whose effort to kill the “first to file” change failed.

Rep. John Conyers (D., Mich.), another opponent, said the legislation would “benefit large multinationals at the expense of independent inventors and small businesses” and would “harm jobs, harm innovation and harm our nation.”

The Innovation Alliance, a lobbying group representing some biotech and tech companies including Qualcomm Inc., pulled its support of the legislation Tuesday over a disagreement over how patent office operations are funded.

Corporate America widely supported a funding provision allowing the patent office to keep all of the money it collects. The office runs on the fees it collects, however in the past two decades Congress has diverted upwards of $800 million in patent fees for other programs. Companies and inventors hope that allowing the patent office keep all its fees would help the office speed up its reviews and clear its backlog of more than 700,000 applications.

But in early June House Budget Chairman Paul Ryan (R., Wis.) and Appropriations Chairman Harold Rogers (R., Ky.), complained the legislation would eliminate annual congressional budget oversight of the patent office by giving it automatic use of any fees its raises.

Under a compromise reached earlier this week, House lawmakers agreed to let the agency keep patent fees but would put any funds excess of its annual budget into a reserve account overseen by Congress. The provision conflicts with the Senate’s patent bill and the White House expressed concerns about the proposal Tuesday, saying the patent office “must be able to use all the fees it collects to serve the users who pay those fees.”

Although the House and Senate bills must now be reconciled, the White House has already signaled its support for the legislation to be signed into law.

Write to Amy Schatz at Amy.Schatz@wsj.com