CHRIS WALLACE, HOST: I'm Chris Wallace.
With the clock ticking toward the "fiscal cliff," it's crunch time on Capitol Hill.
WALLACE (voice-over): As the New Year rings in, we are headed to a major financial hangover. What happens if big tax hikes and spending cuts take effect? Will Washington come up with a last-minute compromise?
(on camera): Plus, where are we headed on new demands for gun control? And, will we ever get all of the answers to the Benghazi terror attacks?
(voice-over): We'll cover a lot of ground when we sit down with two leading senators: Democrat Dianne Feinstein and Republican Lindsey Graham.
(on camera): Also with 2012 in the rearview mirror, we look ahead to 2013.
(voice-over): Our Sunday panel weighs in on what we'll be talking about in the coming year.
All, right now, on "Fox News Sunday."
WALLACE: And hello again from Fox News in Washington.
Well, it turns out the "fiscal cliff" is going to be a cliff-hanger. With less than two days until the New Year, Senate leaders are still trying to work out a deal, to avoid tax increases on almost every American.
But, any compromise will do close to nothing about our debt problem.
Joining us now to discuss what kind of deal they will and won't vote for, are two key senators, Democrat Dianne Feinstein and Republican Lindsey Graham.
Senators, welcome back to "Fox News Sunday."
SEN. DIANNE FEINSTEIN, D-CALIF.: Thank you.
SEN. LINDSEY GRAHAM, R-S.C.: Good morning.
WALLACE: Senator Graham, a couple of days ago you said you thought we were going to go over the "fiscal cliff." Now, we are in the midst of a lot of last-ditch bargaining between the Senate leaders, Reid and McConnell, what are the chances for a small deal in the next, less than 48 hours to avoid the cliff?
GRAHAM: Exceedingly good. I think people don't want to go over the cliff, if we can avoid it.
I think, whatever we accomplish, political victory to the president, hats off to the president. He stood his ground. He's going to get tax rate increases, maybe not $250,000, but upper income Americans.
And the sad news for the country is, that we have accomplished little in terms of not becoming Greece or getting out of debt. This deal won't affect the debt situation. It will be a political victory for the president and I hope we'll have courage of our convictions, when it comes to raise the debt ceiling to fight for what we believe as Republicans.
But hats off to the president, he won.
WALLACE: Quick follow-up, before we turn to Senator Feinstein. You're saying that you don't think some of your conservative colleagues in the Senate will filibuster or set up a procedural roadblock, they'll vote to avoid going over the cliff.
GRAHAM: No. But if McConnell can't get 60 percent of us to vote for this deal, it will be hard for Boehner to get through the House. And I want to vote for it, even though I won't like it them, because the country has got a lot at stake here.
WALLACE: Senator Feinstein, is Senator Graham right? Will we get a deal?
FEINSTEIN: I think he's partially right. You know, yesterday, 2.1 million Americans lost extended unemployment insurance. And, from this point on, it is lose-lose.
My big worry is a contraction of the economy -- the loss of jobs, which could be well over 2 million, in addition to the people already on unemployment. I think, contraction in the economy really would be just terrible for this nation. I think we need a deal, we should do a deal, if Lindsey and I could sit down, I think we could put the deal together.
I think the leadership now is working. It will probably be an immediate deal. In other words, it's not going to solve all of the problems forever. But it's going to solve certain problems.
In other words, not only the unemployment insurance, but, doctors lose 30 percent on Medicare patients, if that isn't remedied. It's called the doc fix. That will probably be done.
The tax extenders will probably be done. And, a number of other things that are instant --
WALLACE: The AMT, the alternative minimum tax --
FEINSTEIN: The AMT -- that's right.
WALLACE: That will be -- there will be a fix that will not hit 20 million more Americans.
FEINSTEIN: That's exactly right.
WALLACE: Let me start focus on the tax rates. That has been the biggest issue in this whole debate. The president wants to extend the tax rates on families making less than $250,000 a year.
Senator Graham, is that acceptable, or does the threshold for when you start to make the Bush tax rates go away, does that have to be higher? Some people say $400,000, $500,000.
And how confident are you that the House which refused to set the mark at a million dollars, will pass any tax rate increase?
GRAHAM: If Democrats will vote for the deal in the House, they are allowed to vote for whatever the Senate passes, there will be enough Republicans. But Boehner needs a majority of the Republican Party.
In 2010, we extended all the tax cuts, because the economy was weak. In 2012, the first part of 2013, we're not going to extend all of the tax cuts, the economy is weaker. I don't understand the economics but I do understand the politics.
The president won. The president campaigned on raising rates and he's going to get a rate increase.
WALLACE: Would you vote for $250,000 if that's it?
GRAHAM: No, because she's willing to go for more and why would I not find $400,000 or $500,000 because I know the votes are there for $400,000 or $500,000.
But in the House, will the votes be there for $400,000 or $500,000? I think a majority of -- 80 percent of the Republicans would have voted for Plan B. But, when you have no Democrats, you need almost all Republicans.
This time around, I think you will get a majority of Republicans and a majority of Democrats in the House if you can get 60 percent of the Republicans in the Senate.
WALLACE: So, Senator Feinstein, is that the sweet spot, $400,000, $500,000, something Democrats will accept, not very happily, but they'll accept --
FEINSTEIN: Well --
WALLACE: -- and it can get through the Republican-controlled House?
FEINSTEIN: You know, the way Democrats feel is this president campaigned and won an election on $250,000. Additionally, the polls reflect there is solid support for that. Certainly, 60 percent of Americans believe that.
Now, having said that, elections matter. So, we believe that the $250,000 threshold is the appropriate threshold. The president did make an offer, we understand, of $400,000, with a trillion in cuts accompanying it. That was turned down by the House.
The time has come, really, to measure the absence of a deal plus -- against a deal. And I think both of us come down that we have to solve this immediate situation.
The danger to our people, to our military, to our nation's security, to our economic base is just too great not to have a solution. So, you know, what makes this government work, is compromise, and, it is when you don't compromise, there is stasis. We've had enough of that for too long.
WALLACE: So, what you're saying is $400,000 you could live with, not happily, but you could live it?
FEINSTEIN: I could certainly --
GRAHAM: Can I just ask the question that I'm going to get asked? Where does the money go? Let's say it's $400,000. The people above $400,000, pay 39.3 --
WALLACE: Which is roughly going to be $600 billion.
GRAHAM: If I'm asked at home, "Senator Graham, what are we going to do with the money," what will I say?
FEINSTEIN: Well, this is added to make up the deficit that everyone has been discussing --
WALLACE: Well, not for spending. It goes for deficit reduction?
FEINSTEIN: Well, no, not new spending. You know, you get down to another thing, which was a very bad idea, and that's sequester. And whether sequester goes into effect or not.
WALLACE: Well, that --
FEINSTEIN: That's the 800-pound gorilla.
WALLACE: OK, let me -- let me ask you about that. I enjoyed your brief stand as the host of "Fox News Sunday."
GRAHAM: Well, I thought it was a good question.
WALLACE: I think it's a good question, too.
But, Senator Graham, all we've been talking about, and, frankly, all that Washington has been talking about for the last month has been the tax side of the cliff. Let's talk about the spending side of the cliff.
GRAHAM: All right.
WALLACE: There is still, as part of the cliff, $110 billion sequestered --
WALLACE: -- automatic cuts, defense cuts, domestic cuts. What's going to happen to that? Would this -- are they going to address that in this deal? Are they going to --
GRAHAM: We'll -- I was called by Leon Panetta last night at 7:30, during dinner.
WALLACE: Secretary of defense.
GRAHAM: Yes. And he said, Lindsey, I have been told that there's going to be nothing in this bill to avoid sequestration going into effect. This is the failure of the super committee to find $1.2 trillion in cuts for the debt ceiling increase. Half of the $1.2 falls on defense. We've already cut $489 billion.
He says if we do this, it will be shooting the Defense Department in the head and we'll have to send out 800,000 layoff notices the beginning of the year. He is worried to death that if we don't fix the sequestration, we're going to destroy the finest military in the world, at a time we need it the most. And this bill doesn't cover defense cuts, on top of the ones we've already have.
WALLACE: So, briefly, are you going to go for a deal today that deals with taxes but doesn't deal with the sequester?
WALLACE: The reason I think I might because I know that Dianne feels the same way. This is a deal without consequence to the debt. She told me all the $600 billion goes on the deficit. I hope that's true. But that's only five percent or six percent of the deficit.
When it comes to defense spending, the only reason I would vote for this bill is sequestration -- if sequestration was not included is trusting people like Dianne to work with me to make sure it never becomes a reality post-January 1st.
WALLACE: Senator Feinstein, in a bigger sense, if you get those automatic cuts, which are $110 billion, $120 billion, in the first year, even if you get those, the deal that you are talking about does not reduce our national debt, because, extending the Bush tax cuts, 98 percent, 99 percent of Americans, it will actually increase the debt by trillions of dollars over the next decade.
So, the question is, when are you guys going to get serious about spending?
FEINSTEIN: Well, we are getting serious about spending. We have already cut spending, between the C.R., and the Affordable Care Act, we have cut spending a trillion dollars-plus. Now, there's an argument over how much. But let's say it's $1.5 trillion.
Having said that, I think there is a commitment to cut spending. If you do it by virtue of sequestration it falls, regardless of priority on things that are very high priority that should not be cut.
I think you either have to postpone sequestration, or you have to take a portion of it. Mark Zandi, for example, has suggested that you do $55 billion, which won't have that much of a retardation on the economy. He estimates that at about a point-and-a-half.
If we do nothing, we lose 3 percent of GDP, because you withdraw from the economy over $700 billion.
WALLACE: Let me --
FEINSTEIN: That is a problem for America if that should happen.
WALLACE: I don't want to get too much into the weeds here, although, obviously, it's a substantive subject. But after the cliff, the next big step, is when we reach the debt ceiling, which we're now told by Treasury Secretary Geithner will be probably around the end of February. Two months.
Assuming that you get this deal, you turn off the Bush tax cuts, for -- the lapse of the Bush tax cuts for 98 percent of Americans, are Republicans are going to go after the Democrats hard on spending part of bargaining on this debt deal? And the president says, I'm not going to negotiate on that anymore.
GRAHAM: Well, here's what I'm going to do -- if you took every penny on the $600 billion and put it on the deficit, it's about six percent or seven percent. And I don't believe all of it will go on the deficit.
But when we raised the debt ceiling in August of 2011, we borrowed $2.1 trillion. We spent that much money in 17 months. Why would I raise the debt ceiling again unless we address what put us in debt to begin with? I'm not going to raise the debt ceiling unless we get serious about keeping the country from becoming Greece, saving Social Security and Medicare.
So, here's what I would like -- meaningful entitlement reform, not to turn Social Security into private accounts, not to take a voucher approach to Medicare. Adjust the age for Social Security, CPI changes and means testing, and look beyond the 10-year window.
I cannot in good conscience raise the debt ceiling without addressing the long term debt problems of this country and I will not.
WALLACE: And, Senator Feinstein, you heard President Obama say we've got to get out of the habit. We're not going to start trading debt ceiling increases for spending cuts.
FEINSTEIN: Well, I think the key to what he is saying is that you don't affect people at this time --
FEINSTEIN: -- who are on these programs.
FEINSTEIN: That you do it in a way that it is way in the future so that long term, the programs are essentially changed and more constricted. Now, that's not entirely popular on my side. But, it's realistic, I think.
I think, you know, this is a very hard time for people.
FEINSTEIN: And, we need to get by this and have a robust economy again, and it can happen, I'm convinced. If we solve this and move down, you can do those things that enable the programs to be solvent on an extended basis, without impacting people directly now.
WALLACE: Senators, we need to take a quick break. But when we come back, we're going to discuss where the investigation of the Benghazi terror attack stands now, and, whether Congress will act in the New Year to try to prevent more mass murders.
WALLACE: We're back now with Senators Dianne Feinstein and Lindsey Graham.
Senator Graham, how important is it for Secretary of State Clinton to testify under oath before she leaves office about the Benghazi terror attack? And what do you think we still need to know about Benghazi?
GRAHAM: Absolutely essential that she'd testify. I want to know from the secretary of state's point of view, were you informed of the deteriorating security situation? Were all these cables coming out of Benghazi, did they ever get up to your level? And if they didn't, that's a problem. If they did, why didn't you act differently?
I think it's very important to know how the intelligence coming from Libya, how it was received in the State Department, so we can learn and correct any mistakes we need to make -- correct.
WALLACE: Some of your Republican colleagues say they are prepared to hold off the confirmation of John Kerry as secretary of state, until Secretary Clinton testifies as secretary, before she leaves office.
GRAHAM: That's going to happen. I've been told by Senator Kerry he wants that approach also. He needs to hear what she says so he can make comments about, I agree with her/I don't agree with her. It makes sense to have her go first.
WALLACE: Do you agree with that, Senator Feinstein, that she needs to testify first, as an -- and have you been assured she will testify, though it has been 3 1/2 months since Benghazi and she still has never really answered questions, about Benghazi, her role before, during, after the attack? Do you have reason to believe she'll testify as secretary?
FEINSTEIN: She has said she will and I believe she will. You know, she's had a very real accident and she's recovering from it, and, she will be back. I gather, her first day, of work may well be next week. So, I think that's good news.
Having said that, I think Benghazi is a real learning -- very hard learning example for us. Our part of it, the Intelligence Committee's part of it is the intelligence. And, I have gone through the intelligence and there were two full binders of intelligence and there was a great deal of intelligence that would indicate that something well could happen. It wasn't tactical, it didn't say, on September 11th you can expect x, y or z. But there was enough to know that there were problems in the area.
There were also attacks, prior attacks, British ambassador, the Red Cross, prior attack on the mission, et cetera. So, we had reason to believe that there was a problem there.
As Lindsey pointed out, the problem was, the right people apparently either didn't make the decision, or, didn't analyze the intelligence, because I think if you looked at the intelligence, you would have substantially beefed up the security in that particular mission, in Benghazi. And, it didn't happen, sufficiently. We lost four people, a bright ambassador.
Additionally, the mission didn't have those basic things, gas masks, fire extinguishers, appropriate cameras that could do what cameras can do today.
So, we have learned this. I think it's up to the State Department. It's up to us to provide the money -- here we go again -- and up to the State Department, to make the changes that are necessary.
WALLACE: The apparent front-runner for the new defense secretary, Panetta, of course, is going to retire -- apparently is one of your former Senate colleagues, former Republican Senator Chuck Hagel, who has come under fire for positions he's taking on engaging Iran and supporting defense spending cuts.
On "Meet the Press" this morning, President Obama apparently, while he didn't say he's going to name him, said he has seen nothing in any of the criticism to block him.
Senator Graham, are Republicans going to block Chuck Hagel if he's the nominee for defense secretary?
GRAHAM: I think a lot of Republicans and Democrats are very concerned about Chuck Hagel's position on Iran sanctions, his views toward Israel, Hamas and Hezbollah, and that there is wide and deep concern about his policies. All of us like him as a person.
GRAHAM: It will be up to the president to make the selection. The hearings will matter. They will matter a lot to me. And if he sends Chuck Hagel up, it will be a confirmation hearing of consequence.
WALLACE: So, at this point, you are not prepared to say the Republicans would put a hold on the nomination, or filibuster it?
GRAHAM: I can't -- I can tell you there would be very little Republican support for his nomination. At the end of the day, they will be very few votes.
WALLACE: Senator Feinstein, you are going to introduce legislation this week on the first day of the new Congress, on Thursday, to ban assault weapons, and magazines that hold more than 10 rounds of ammunition.
Why is that more effective than the NRA proposal to put armed guards in every school?
FEINSTEIN: Well, in the first place, 1/3 of America's public schools does have armed guards. Secondly, there were armed guards at Columbine, they couldn't stop the shooters.
So, the question comes, what do we do about the growing sophistication of military weapons on the streets of our cities? They aren't good hunting weapons. I mean, no hunter, in my view, worth his or her salt, would use an assault weapon to hunt, and, they're not necessarily good defense of weapons.
So, what we would do is take the earlier bill and strengthen it in many ways, prevent the gun manufacturers, from getting around it as they did. Go to a one physical characteristic test, take specific models and ban their manufacture, their sale and their transfer, and take the weapons that are grandfathered, that are in possession now, and put them under the Federal Firearms Act so that they would be licensed, there would be background checks down.
America has to bite the bullet of what these incidents mean to our people, to our nation, and our nation's standing in the world. When you have someone walking in and slaying in the most brutal way 6- year-olds, something is really wrong.
This is one effort and other things we should do to try to put weapons under some kind of appropriate authority.
WALLACE: Senator Graham, you support the NRA plan to put more school security in place, and you oppose Senator Feinstein's assault weapons ban. Why is she wrong?
GRAHAM: We'll, we had the assault weapons ban from 1994 to 2004 and the conclusion was, it did not change crime by banning assault weapons in an appreciable way, and last year with the lowest murder rate in the history of the United States, people buying more guns, murder rates have gone down -- you are talking about preventing mass murder by a mentally unstable persons. You can't take every sharp object out of the reach of people like this.
I own an AR-15 and I have done nothing wrong by owning the gun. If you had armed security, with better rules of engagement, that, to me, is a better way to deal with the situation.
And the best way is to identify these people before they act and do something about it.
So, I think the assault weapons ban didn't work then. It's not going to work now, and I will oppose it.
WALLACE: So for all the talk and horror --
GRAHAM: We share the horror.
WALLACE: -- and I think both of you share what you feel about Newtown, and the tragedy there, will Congress do anything this year to address mass murders, whether it's gun control, whether it's changes to our mental health laws and access to mental health, whether it's violence in the media? Senator?
FEINSTEIN: Well, I believe we are going to certainly try.
Now, let me respond to Lindsey about the murder rate. Over 9,000 people are killed with guns a year. Where there aren't guns, there isn't that murder rate -- 9,000 people. That's a lot of people.
Secondly, I think we've come to a point where these mass murders, the grievance killers that go out there, that get the most sophisticated weapon they can possibly get their hands on, and then go into movie theaters, malls, offices, businesses, and schools, and mow down people, you have to have some appropriate controls on these weapons.
Now, he may feel safer because he has an AR-15. I don't know, that is up to him. He would not be affected by this.
But I think having a system where these very powerful weapons -- as a matter of fact, the Bushmaster has a legal slide you can put on it to make it fully automatic. And just pump out slews of bullets and it gives --
WALLACE: I want to -- I want to give Senator Graham an opportunity the respond briefly and then I want to move on.
GRAHAM: Well, the bottom line is, is it triggered by the movies they watch, videos they watch or the books they read? We have a First Amendment and Second Amendment. They're not absolute. You can regulate guns. You can regulate speech.
But what she is proposing is a massive intervention. Gun sales are up and crime is down. It's a false sense of security you are pursuing here.
You're not going to be able to stop mass murderers with no criminal record just by taking my AR-15 and making me pay $200 and get my finger prints and say, I can't buy another one. It didn't work then, didn't work before.
Identify these people before they act, put security in places they are likely to go, like schoolhouses. If you go into this Capitol, you're going to be met with some armed force. If you go into a schoolhouse, the best solution to protect children is to have somebody there to stop the shooter, not get everybody's gun in the country.
WALLACE: We're not going to solve this today. And let me -- forgive me, but I just want to move on to one other subject -- which is actually, has been holding up action a lot of people would say.
Senate faces a big moment on January 3rd, the first day, on whether to change the rules and make it harder for the minority to filibuster and block the majority, and you both have been in the majority and you both have been in the minority. A plan Senate Majority Leader Reid is prepared to offer is being called the nuclear option because he would pass by a simple majority of 51 votes.
But a bipartisan group of senators has come up with a compromise that wouldn't change the rules as much but also wouldn't be the majority forcing its will on the minority.
Feinstein, what's going to happen? Is there going to be filibuster reform, and what kind?
FEINSTEIN: At Thursday's caucus, we had a briefing. There are three groups of senators that had been working on three different proposals for rules changes. It was put before the Democrats for the first time, on Thursday. And, we listened to it.
I think there are some changes that can be made, on a bipartisan basis. I think that's where things are going right now, to try to see what we can agree upon. If we can't, then, the so-called nuclear option comes into play. I am hopeful that that is not the case because, what goes around comes around and I think the imminently desirable thing is to have agreement between us.
So, we need to agree --
WALLACE: Real quickly, would you oppose the nuclear option of it's a simple up-or-down vote, 51 votes, to impose the will of the majority? FEINSTEIN: At this stage, I don't believe it's necessary. I believe we can work something out that both parties can accept.
WALLACE: Senator Graham, you were part of the bipartisan group that came up with the compromise. It gets awfully technical, folks, but, basically it would remove some of the procedural roadblocks to a deal. On the other end, wouldn't remove all of them. Will both sides accept that and will it change anything? Because you'll still be able to filibuster.
GRAHAM: I hope and pray both sides accept it because I was in the "Gang of 14". During the Bush administration, all the judges were blocked, and couldn't get a judicial vote. Our guys got really upset. Bill Frist wanted to change the rules of the Senate so that you need only 51 votes to confirm a judge.
Seven Democrats and seven Republicans, I was one of the Republicans, said, let's don't change the rules because we have a problem for the moment, we don't want the Senate to become the House.
I'm saying now, what I said, then, when Republicans wanted to change the rules, I said, no, it is bad for the institution. And when Democrats are proposing the same thing, I say, no.
I think people like Dianne and myself are going to prevail. There will not be a draconian change that will make the Senate the House. We'll work this out.
WALLACE: Senator Graham, Senator Feinstein, thank you both. Thanks for talking with us about a range of issues. You are both good company as always and happy New Year to both of you.
GRAHAM: Thank you.
FEINSTEIN: Same to you.
WALLACE: Thank you.
FEINSTEIN: To all of us.
GRAHAM: Thank you.