If Congress is going to avoid steep across-the-board budget cuts next January, the first sign will be a change in how Republicans will address taxes to reduce the deficit, says the chairman of the Senate Armed Services Committee.

A handful of Republicans including Sen. Lindsey Graham (S.C.) have indicated they would be willing to see some tax increases through closing loopholes as a way of reconciling the bloated federal deficit. Others are bound by a pledge drafted by former Mississippi Gov. Haley Barbour (R) not to increase taxes. But that could change, says Sen. Carl Levin (D-Mich.), the head of the panel that sets defense policy.

“You’re going to, I hope, get answers from candidates as to whether or not they are going to stay with the Haley Barbour-type pledge. Or you will see more and more as a few have already done suggesting that they are not going to be bound by that pledge,” Levin says. “You’re going to hopefully see people on the Republican side who have signed those pledges gradually recognize that there can be no deficit reduction and you can not protect defense ... without additional revenue.”

As defense companies already begin to feel the effects of the uncertainty caused by a $600 billion cut one quarter into fiscal year 2013, Congress is beginning to take note. Levin foresees a potential “confidence-building measure” that would send a signal to industry that lawmakers can find a middle ground. But what Levin suggested as a meeting point hardly touches on the eventual real compromise that would have to take place to avert the penalty of a $1.2 trillion across-the-board cut come Jan. 2, 2013, known as “sequestration.”

According to Levin, that may be an agreement to fund the extension of tax cuts that both Democrats and Republicans support, such as for research and development.

Sen. Lamar Alexander (R-Tenn.) says Republicans are all looking at the best way to resolve a number of tax issues. In terms of avoiding sequestration, Alexander says it is important to lay the foundation for whoever is elected president in November.

“We need to create a fertile ground here in the Senate, in the House to help him succeed,” says Alexander, who is talking with both parties behind the scenes to facilitate such an agreement.

“Tax reform is at the top of the list of most Republican senators. Many of us feel that means broadening the base, closing the loopholes, and it could include more revenues. But for me, only if we have a plan to reduce mandatory spending.”