Senate leaders reached an agreement Friday to extend the payroll tax cut for two months, averting a New Year’s tax increase for millions of workers. The agreement also will require the administration to decide quickly whether to allow construction of a controversial transcontinental oil pipeline.
President Obama had demanded that Congress extend the tax holiday, but Republicans had refused to go along unless the White House agreed to an accelerated decision on the pipeline.The short-term agreement means that Congress will return to a familiar fight almost as soon as it reconvenes next year.
“We’ll be back discussing the same issues in a couple months,” Senate Minority Leader Mitch McConnell (R-Ky.) said.
Indeed, Senate Majority Leader Harry M. Reid (D-Nev.) vowed late Friday that Democrats would spend the next two months pushing for a full-year extension.
White House communications director Dan Pfeiffer called the deal a “significant victory,” extending a tax cut that many analysts say will help the economy.
“The president said that Congress cannot go home without preventing a tax increase on 160 million hardworking Americans, and the deal announced tonight meets that test,” Pfeiffer said.
The Senate will vote on the deal Saturday, and the House will take it up next week. The inclusion of the controversial pipeline was intended to satisfy House Republicans who had been objecting to a short-term tax fix. McConnell said he was optimistic the deal would find favor with the House.
Meanwhile, the House approved a massive spending measure Friday that would stave off the threat of a government shutdown through September. The Senate prepared to sign off on the measure as early as Saturday.
Under the separate Senate agreement on the payroll tax, the rate paid by 160 million workers would remain at 4.2 percent through February, rather than reverting to 6.2 percent on Jan. 1.
In addition, benefits for the long-term unemployed would be extended for two months, and scheduled cuts to Medicare reimbursement rates for doctors would be postponed.
Senators had spent the day discussing a broader deal that would last 11 months, through November’s election. But they were unable to get past a stumbling block: cuts that would make the roughly $190 billion package deficit-neutral.
Democratic and Republican aides said that the two sides agreed to about $120 billion in cuts to spending programs.
But that left a gap of $50 billion to $70 billion, aides said.
Democrats blamed Republicans for blocking savings that could come from closing loopholes such as tax breaks for corporate jets, while Republicans blamed Democrats for refusing to agree to GOP requests to extend a pay freeze for federal workers.
“The fundamental issue is how you get pay-fors that everybody can agree to, and it’s extremely difficult,” Sen. Kent Conrad (D-N.D.) told reporters Friday evening.
A two-month package would cost $40 billion. Senators would pay for it with items identified by both sides during this year’s deficit-reduction talks, including higher fees on lenders Fannie Mae and Freddie Mac.
Under the agreement, Congress would approve language requiring that a construction permit be issued for the 1,700-mile Keystone XL pipeline within 60 days unless the president determined the pipeline was not in the national interest.
“The House of Representatives has been quite clear that they’re not going to support a package that does not include the pipeline,” McConnell said on the floor Friday.
“Frankly,” he added, “I will not be able to support a package that doesn’t include the pipeline.”
Republicans, who had been divided and on the defensive over the advisability of extending the popular tax cut, said they believed that they had turned the debate to their advantage by linking it to the pipeline project, which they say would create jobs and promote energy independence.
By foisting the pipeline language on Obama, they will force him to decide during his reelection effort whether to proceed with a project that divides his union and environmental supporters.
In response to environmental concerns about the pipeline’s routing in Nebraska, the State Department announced last month that a decision on the project would be delayed until early 2013.
Obama said last week that he would reject “any effort” to tie the tax cut to the pipeline project. The State Department indicated this week that it could not complete the necessary reviews in 60 days and, if forced to do so, would reject the project.
An administration official said the GOP had insisted on language that would likely result in no permit being issued for the pipeline.
The extension of the tax cut let the White House declare victory on Obama’s signature year-end legislative initiative. Allowing the one-year tax holiday to expire would have meant a tax increase of $1,000 next year for a family making around $50,000 a year.
The payroll tax had been the centerpiece of Obama’s jobs program. It was intended to ensure workers could keep more of their salaries in the down economy.
The president had proposed cutting the Social Security tax more deeply — to 3.1 percent — and extending the holiday to some employers, who also pay a 6.2 percent payroll levy. In recent days, Obama said that Congress should not leave for the holidays without extending the tax cut.
Republican leaders had said they were willing to extend the cut. But they faced a revolt from rank-and-file members, many of whom said that a temporary cut would do little to help the economy and that repeated tax holidays would undermine the Social Security Trust Fund over time.
Meanwhile, the House adoption Friday of a measure that would fund three-fourths of the government through fiscal 2012 came just hours before a temporary measure that was keeping government open was to expire.
When added to a bill adopted in November, the measure would provide $1.043 trillion to fund the government, 1.5 percent less than last year.
The White House had sought to delay a final decision on the spending bill until a deal was reached on the payroll tax cut.
Democrats had feared that House Republicans might approve the spending measure and then leave Washington without settling the payroll tax issue. The House did exactly that Friday: Members raced out of town as soon as they voted. But leaders promised to call the House back to Washington — perhaps Monday — to take up the Senate’s payroll tax deal.
Staff writer Felicia Sonmez contributed to this report.