Monday begins a pivotal week in Congress, the last opportunity this year to pass some kind of economic stimulus package to boost the ailing economy. This will also be a decisive moment for legislation to keep the federal government running on a leaner budget for the rest of the fiscal year.

Even though House and Senate leaders agree that the economy needs help, the two sides have failed to agree on how to approve an extension of the payroll tax holiday that President Obama pushed as part of his job-creation package in September. Set to expire on New Year’s Day, the tax provision has emerged as a key stumbling block in the annual rush to approve must-have legislation before Congress adjourns for the year.

In the tax-holiday debate, Democrats are largely united, while many rank-and-file Republicans are resisting overtures from their leaders to support the extension. The unusual dynamic of GOP discord over lower taxes has given Obama and his party a degree of political momentum they have been lacking since the 2010 elections.

“Our proposal would create jobs, put more money in the pockets of the middle class and working families, and theirs would in effect take those benefits away,” Senate Majority Leader Harry M. Reid (D-Nev.) said last week.

On Sunday, Democrats said Reid would make a new offer, perhaps Monday, to provide offsetting savings from a tax benefit that some economists say adds an extra 1 percent to economic output. House Speaker John A. Boehner (R-Ohio) is likely to offer his own proposal this week, setting up potentially dueling votes over the proposals by week’s end.

Reid and Boehner are probably headed for a final negotiation on the payroll tax that will initiate a two-track process for the legislation, which the leaders say must pass before Christmas. Along with the tax holiday, leaders are considering attaching an extension of unemployment insurance benefits and a measure to adjust Medicare payments to doctors — all of which, according to Boehner, will need accompanying spending cuts to make the package deficit-neutral.

In addition, Congress has until Dec. 16 to iron out the final pieces of a spending blueprint for roughly two-thirds of the federal government, a huge package that sets federal agency budgets at $1.043 trillion for 2012.

In a largely overlooked statement last week, Boehner acknowledged that after two straight years of spending reductions, those agency budgets are pretty lean.

“We’ve done most of what can be done,” he told reporters Thursday, suggesting that any further long-term deficit savings must come from changes in the tax code and entitlement programs.

Both sides on Capitol Hill are expressing optimism that the spending plan is on track for bipartisan approval, but the White House late last week issued several veto threats if Republicans insert policy provisions in the bills, such as funding restrictions on the new health-care law.

“If congressional Republicans want to avoid a veto and are serious about avoiding a costly government shutdown and preventing the uncertainty that a shutdown would bring to our markets and our economy, they will stop attempting to re-litigate the August agreement and abandon ideological stunts,” Dan Pfeif­fer, Obama’s communications director, wrote on the White House blog.

The relative calm surrounding the spending measure has raised the political stakes for the showdown over the payroll tax package.

The usual payroll tax rate of 6.2 percent was temporarily slashed to 4.2 percent in a deal that Vice President Biden negotiated last December with Senate Minority Leader Mitch McConnell (R-Ky.). That deal also extended the George W. Bush-era tax cuts through the end of 2012. Democrats say the payroll tax holiday effectively puts more cash in the hands of consumers, particularly the middle class. To finance another year’s holiday, Democrats proposed a 3.25 percent surtax on millionaires. Republicans rejected this new tax, as they have every time Democrats offered it this fall as a way to pay for other pieces of the Obama jobs plan.

Republicans believe they hold the political advantage because of the economy’s struggles.

But Democratic spirits were buoyed by Friday’s announcement that the unemployment rate had dropped to 8.6 percent, its lowest rate since early 2009, and GOP division on how to handle the payroll tax holiday.

This gave them a sense of having a slight wind at their backs, a rarity in the past several years.

GOP leaders remain supportive of extending the payroll tax holiday.

“I don’t think there’s any question that the payroll tax relief, in fact, helps the economy. You’re allowing more Americans — frankly, every working American — to keep more of their money in their pocket. Frankly, that’s a good thing,” Boehner said Thursday.

But that night, only 20 Senate Republicans supported an alternative proposal by McConnell to provide an extension of the plan. The McConnell proposal would have paid for the extension with pay freezes and reductions in the federal workforce. On Friday, Boehner’s leadership team tried to corral his rank and file behind a plan to extend the payroll holiday, but many Republicans simply rejected the proposal outright as a flawed way to create jobs, according to GOP aides.

Some Republicans warn that those payroll taxes support Social Security, meaning that any diversion of funds puts the program on a less secure setting in the years ahead.

Boehner is considering a bill that wraps the payroll tax plan in with other items that are considered conservative priorities, including a proposal to force the Obama administration to make a quick decision on a proposed energy pipeline from Canada to the Gulf Coast.

House Minority Leader Nancy Pelosi (D-Calif.) rejected that proposal as unrealistic, suggesting instead that the savings from the conclusion of the Iraq war and the drawdown of troops from Afghanistan be counted to offset the tax holiday, unemployment benefits and the Medicare payments for doctors.

Democrats hope to exploit the divisions within the GOP to help shape the final legislation to their liking. McConnell’s efforts have shown little progress toward a bill that can win bipartisan support, and Boehner has repeatedly needed Democratic assistance this year to approve budget bills.

“We are prepared to cooperate on behalf of the welfare of our country and of our people,” said House Minority Whip Steny H. Hoyer (D-Md.).


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