The contours of an agreement on the payroll tax holiday were taking shape as Democrats dropped their demand that a surtax on people making $1 million or more be imposed to pay for the payroll tax cut, which expires Dec.31. It provides an average $1,000 annual benefit for 160 million working Americans.
Instead of continuing the payroll tax break for a full year, negotiators were considering a two-month extension as a fallback option if the parties could not agree on the longer deal, according to those familiar with the talks. A short-term deal also would include a continuation of unemployment benefits, which also run out at the end of the year for some recipients, said the congressional sources, who spoke on the condition of anonymity to discuss the negotiations.
Talks continued behind closed doors into the evening as both Republicans and Democrats sought a consensus on how to pay for it.
"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 funding 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 that runs through September 2012, were expected Friday.
Hurdles remain as Obama must decide the price he is willing to pay to keep the tax break, which mainstream economists assert is vital to nursing along the struggling economy. The tax break slices the Social Security contribution workers pay from 6.2% to 4.2%, and economists say it puts money in the hands of those who are likely to spend it.
As Republicans resisted the tax on wealthier Americans, Democrats have been forced to consider GOP options for offsetting the costs 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 corporate jet tax loophole, an idea that had previously drawn bipartisan support.
Reaching an agreement that can capture a large enough swath of votes from the political left and right in Congress will be the challenge in the limited time remaining. News that the talks now included consideration of a two-month extension for the tax cut demonstrated the difficulty of agreeing on a way to pay for the package. The short-term option also would include a routine pay adjustment for doctors who serve Medicare patients.
"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 toll of failing to reach a deal had motivated lawmakers to reach a solution as the holidays approach.
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 in support of building the controversial Keystone XL oil pipeline from Canada, which Obama shelved to give the government more time to study environmental concerns. 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 controversial oil pipeline 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 the department insufficient time to make a determination about the project.