By Susan Cornwell
WASHINGTON (Reuters) - Republican Senator Lindsey Graham said on Thursday his party's anti-tax orthodoxy needed to be revisited, sparking interest from a senior Democrat who pledged to work with him to try to avoid deep automatic budget cuts set for early next year.
Graham, a conservative Republican, said he did not agree with fellow Republicans who thought any money saved by closing tax loopholes and eliminating tax deductions must go toward lowering tax rates, as opposed to using the savings for deficit reduction.
Graham's view deviates from the anti-tax pledge sponsored by Grover Norquist, head of Americans for Tax Reform. Adherence to the pledge, which has been signed by many U.S. Republicans nationwide, serves as a litmus test for electoral support among many conservatives.
"I signed the pledge myself … I actually like Grover, I think he's done a pretty good job of trying to keep the country from raising taxes," Graham told the Senate Appropriations Committee as it was voting on defense spending for next year.
"This (anti-tax) pledge has a component to it that I think needs to be revisited. I don't know how we get out of debt if we don't have bipartisanship," Graham said, adding that revenues generated by closing loopholes and eliminating deductions could go toward deficit reduction.
Graham's latest remarks are potentially important because he is a Republican senator outspoken about the need to avoid the automatic cuts in Pentagon spending.
His comments could tempt Democrats looking for a wedge between rank-and-file members and Republican leaders, who continue to hew to the party line of no new additional revenues as part of deficit-reduction and only as part of comprehensive tax reform.
Democratic Senator Patty Murray, also a member of the appropriations committee, said she would work with Graham in the to try to find a formula for avoiding sequestration, the process by which over $1 trillion in across-the-board spending cuts are automatically set to take effect over the next decade.
The first slice of those savings, about $109 billion, will be triggered on January 2 unless Congress comes up with an alternative plan that President Barack Obama also embraces.
Democrats also worry about the blunt force of the spending cuts and are trying to pressure Republicans to go along with a mix of domestic and military spending cuts coupled with tax hikes on the wealthy.
"I will work with Senator Graham over the (August congressional) recess and anyone else to find a way to find that balanced approach as we move forward, so that we do not face the impact of sequestration," Murray said.
"It is going to take a balanced approach, it is going to take all of us, swallowing hard, to reach a tough decision," Murray said.
The automatic spending cuts are the result of a deficit-reduction deal struck last August by Obama and Congress that also raised Treasury Department borrowing authority to avoid an historic government credit default.
An attempt in Congress by a "supercommittee" of lawmakers, including Murray, to replace the automatic spending cuts with a series of more targeted, well-thought-out reductions and revenue increases collapsed last November.
But as next January's deadline for the automatic cuts has neared, lawmakers are getting more interested in trying to find a way out. Half of the across-the-board spending cuts would hit defense, with the rest aimed at other domestic programs.
The Senate appropriations committee voted down a proposal by Graham to make defense contractors issue notices of potential layoffs to their workers just before the November presidential election, a step that could have significant political repercussions. Graham wanted to overturn guidance from the Labor Department which this week said the notices are not required.
Graham said he wanted to avoid sequestration for a year, or at least a few months. But he wants to solve the issue before the November elections; some on Capitol Hill wonder whether this can happen in the current hyper-partisan, pre-election atmosphere.
Graham's is not the only bipartisan effort on Capitol Hill seeking a sequestration escape hatch.
Talks have been going on for some time between Republican Senator John McCain and Democratic Senator Carl Levin; another set of talks is being led by Democrat Mark Warner and Republican Saxby Chambliss.
The idea of deferring sequestration for a year may be catching on at the Pentagon as well.
Defense Secretary Leon Panetta told corporate executives last week that the notion of deferring sequestration for one or two years while identifying significant offsetting cuts was getting more traction on Capitol Hill, according to people familiar with their meeting.
(Additional reporting by Richard Cowan, Donna Smith, and Andrea Shalal-Esa; Editing by Fred Barbash and Dan Grebler)
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