WASHINGTON — Senate leaders reached an agreement Friday to extend the payroll tax cut for two months and avert 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 Barack 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.
The Senate will vote on the deal today, and the House will take up the package next week. The inclusion of the controversial pipeline was intended to satisfy House Republicans who had been objecting to a short-term 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 funding measure as early as today.
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.
Leading senators had spent the day discussing a broader deal that would last 11 months, through next November's election. But they gave up after they were unable to get past a key stumbling block: offsetting cuts that would make the roughly $190 billion package deficit-neutral.
"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 after emerging Friday evening from the office of Senate Majority Leader Harry Reid, D-Nev.
A two-month package would cost $40 billion. Senators would pay for the package with items identified by both sides during this year's deficit-reduction talks, including higher fees on lenders Fannie Mae and Freddie Mac.
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.
"The House of Representatives has been quite clear that they're not going to support a package that does not include the pipeline," McConnell said on the floor Friday. "Frankly, I will not be able to support a package that doesn't include the pipeline."
Republicans, who had been divided and on the defensive over the advisability of extending the popular tax cut, say they have turned the debate to their advantage by linking it to the pipeline project, which they say would create jobs and promote energy independence.
They believed Friday that they had succeeded in foisting the pipeline language on Obama, forcing him to decide in the middle of his re-election effort about a project that divides his union and environmental supporters.
The extension of the tax cut will allow the White House to declare victory on Obama's signature year-end legislative initiative. Allowing the one-year tax holiday to expire would mean a tax increase of $1,000 next year for a family making around $50,000 a year.
The payroll tax had been the centerpiece of Obama's American Jobs Act. It was intended to ensure workers could retain and spend more of their salaries in the down economy.