Congress reaches tentative deal to avoid government shutdown

Weary of one last round of brinkmanship before the holidays, Congress reached a tentative deal late Thursday on a $1-trillion spending bill that would avert a government shutdown as both parties continued to discuss extending President Obama’s payroll tax break.

Negotiators were considering a two-month extension of the payroll tax holiday, which is set to expire Dec. 31, in case they could not agree to continue it for a full year, according to those familiar with the talks. The measure trims workers’ Social Security tax from 6.2% to 4.2%, providing an average $1,000 annual benefit for 160 million working Americans.

The possible short-term deal emerged after Democrats dropped their demand for a surtax on earnings of $1 million or more to pay for the tax cut. The two-month package would be a fallback and would include continuation of unemployment benefits, which also run out at the end of the year for some recipients, said the congressional sources, who discussed the negotiations on the condition of anonymity.

Talks continued behind closed doors into the evening as both Republicans and Democrats sought a consensus on how to pay for the tax cut.

“We hope that we can come up with something that would get us out of here at a reasonable time in the next few days,” said Senate Majority Leader Harry Reid (D-Nev.).

Late Thursday, Reid loosened his block on the government funding bill, which was seen as a sign of progress. Democrats had stalled the bill as a bargaining chip to bring Republicans to the table on the payroll tax break. Votes on the spending bill, which would fund the government for the rest of the current fiscal year, through September 2012, were expected Friday.

But hurdles remain. Obama must decide on the price he is willing to pay to keep the tax break, which mainstream economists assert is vital to the struggling economy because it puts money in the hands of people who are likely to spend it.

As Republicans resisted the surtax on wealthier Americans, Democrats were forced to consider GOP options for offsetting the cost of the $200-billion package. Some spending cuts may be acceptable, but others, such as reducing unemployment benefits or charging upper-income seniors more for Medicare, face Democratic resistance.

Democrats were pushing for other alternatives — including raising revenue by eliminating a tax loophole on corporate jets, an idea that had drawn bipartisan support earlier.

Reaching an agreement that can capture enough votes from the political left and right in Congress will be the challenge in the limited time remaining. News that the talks now include consideration of a two-month extension for the tax cut demonstrated the difficulty of agreeing on how to pay for the package. The short-term deal also would include a routine adjustment for doctors who serve Medicare patients, preventing about a 20% cut in payments.

“They’re working very constructively,” said Sen. Jon Kyl of Arizona, the No. 2 Republican in the Senate.

Sen. Kent Conrad (D-N.D.) said the talks were progressing as the reality of the economic and political costs of failure motivated lawmakers.

At the White House, Press Secretary Jay Carney declined to restate the president’s threat to veto the package if it included a GOP provision to support the controversial Keystone XL pipeline, which Obama shelved to give the government more time to study environmental concerns. The pipeline would run from Canada’s oil shale fields to Gulf Coast refineries.

A package passed Tuesday by the Republican-controlled House, but unlikely to pass the Senate, would require the State Department to make a decision on the project within 60 days of the bill’s passage.

“What the president said, I would remind you, is that he would reject a provision — he would reject a proposal that tried to mandate approval of the Keystone project,” Carney said.

The State Department has said such a deadline is arbitrary and would compromise the permit process, leaving insufficient time to make a determination about the project.

lisa.mascaro@latimes.com

Kathleen Hennessey in the Washington bureau contributed to this report.