Tentative deal on payroll tax cut

Congressional negotiators reached tentative agreement Friday on a two-month extension of President Obama’s payroll tax cut, and in doing so potentially cleared the way for approval of a spending measure this weekend to avert a government shutdown.

The short-term payroll tax holiday comes as Democrats and Republicans failed to achieve a consensus on how to pay for a full-year extension of the tax break, which expires Dec. 31 and gives an average $1,000 annual benefit to 160 million American workers.

The temporary deal ensures that the volatile political issue will continue as the 2012 campaign season unfolds.

A vote is expected Saturday in the Senate. House members left town Friday after approving a $915-billion bill to fund the government, but were expected back in Washington next week.

The House passed a GOP-backed payroll tax cut package earlier this week, but House leaders were not a formal part of the latest negotiations in the Senate. House Speaker John A. Boehner (R-Ohio) had not publicly signed off on the deal.

Obama postponed his Hawaiian vacation as hopes for averting a government shutdown continued to be complicated by negotiations to extend the tax break. The deal was reached after a tumultuous day of closed-door talks.

“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,” said White House Communications Director Dan Pfeiffer. “The president urges Congress now to finish up their business for the American people.”

The Senate package includes a GOP-backed provision to accelerate the administration’s review of the controversial Keystone XL pipeline, a provision Obama had rejected as a deal-breaker. It also would extend long-term unemployment benefits, a Democratic priority, for the next two months, and it includes an annual pay adjustment for doctors who treat seniors on Medicare.

Dropped was a GOP-led provision in the House-passed bill that would roll back air regulations on industrial boilers that emit mercury and other pollutants.

The White House has toned down Obama’s threatened veto over the Keystone measure. The State Department said this week it would not be possible for it to process the permit under the 60-day accelerated schedule called for in the GOP provision. That makes a veto unnecessary.

The difficulty in devising a package has been how to pay for the tax break, which shaves the tax that workers pay into Social Security from 6.2% to 4.2%.

Republicans rejected Obama’s proposal to increase taxes on those who earn at least $1 million a year, and Democrats were reluctant to cut deeply into government programs, including jobless benefits, as the GOP proposed in its House-passed bill.

Instead, negotiators agreed to draw revenue for the smaller deal, estimated to cost more than $30 billion, by increasing a fee on loans backed by Fannie Mae and Freddie Mac. That revenue source had been well received by both parties in past talks.

“I’m optimistic we’re going to do well,” Sen. Mitch McConnell of Kentucky, the Republican leader, told reporters late Friday evening. “So we’ll be back discussing the same issues in a couple of months.”

For Senate Democrats, the plan seemed a harder sell. The deal has no major Republican concession and by punting the fight down the road it threatens only to confirm the public’s view that Congress is dysfunctional.

At least one Senate Democrat looking at reelection next year, Sen. Joe Manchin (D-W.Va.), emerged from an evening briefing undecided.

Democratic leaders argued that the party would be in a stronger bargaining position on the issue two months from now — when the threat of a government shutdown is off the table. They plan to revive their proposal to pay for the package with a tax on incomes beyond $1 million.

Referring to Republican opposition to the proposal, Sen. Charles E. Schumer (D-N.Y.) said, “If they’re going to keep opposing it and opposing it and opposing it, it’s going to hurt them.”

As talk of the temporary extension was first floated, some House lawmakers were cool to the idea.

“I’m not very comfortable with it at all,” said Rep. Austin Scott of Georgia, the president of the GOP’s freshman class. He added, “If we continue to have to do this thing month after month after month, then you’re not going to see the job creation that should come from this.”

Agreement on the payroll tax extension came after the GOP-led House easily approved a $915-billion spending bill Friday to fund the government through the 2012 fiscal year, dodging a midnight deadline. By paying for operations through September, the bill will, for now, end the cycle of Congress fighting over spending under perpetual doomsday threats. The measure passed easily on a bipartisan vote of 296-121, though conservatives rebelled in considerable numbers.

Additionally, the House and Senate approved a one-day stop-gap government funding measure that gives the Senate until midnight Saturday to pass the broader spending package and send it to the president.

lisa.mascaro@latimes.com

kathleen.hennessey@latimes.com