Senate leaders reach agreement to extend payroll tax cut for 2 months

Washington (Washington Post) - 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.

“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.