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Tax-Cut Extension Deal Nears

WASHINGTON -- President Barack Obama and Democratic lawmakers weighed a temporary cut in Social Security taxes, eager to get a year-end agreement with Republicans to extend expiring income tax cuts to all Americans and renew jobless benefits for the long-term unemployed.

Officials familiar with the discussions said the plan would reduce the payroll tax for workers from the current 6.2 percent to 4.2 percent. The proposal would replace a tax credit for middle- and low-income workers that ends Dec. 31.

Extending that tax credit was one of the provisions that the White House had wanted in any deal struck with the GOP. But a cut in payroll taxes is expected to put more money in workers pockets.

Officials described the plan on the condition of anonymity because negotiations were still in flux.

One official said that Obama and Republicans had been discussing a two-year extension of the estate tax under which $5 million would be allowed to pass to heirs tax-free, and anything above that level would be subject to a 35 percent federal tax.

Democrats have been critical of Obama for signaling a willingness to bow to Republican demands that any tax cut extension apply at upper income levels as well as to the middle class.

Obama and Democratic leaders met at the White House shortly after Obama returned to Washington from a trip to North Carolina, where he said he and Congress must "make sure we're coming up with a solution, even if it's not 100 percent what I want or 100 percent what the Republicans want."

Momentum for a year-end deal picked up after Obama met at the White House last week with Republican leaders for the first time since his party's dispiriting losses in midterm elections, and accelerated again when the government reported last week that joblessness had risen in November, to 9.8 percent.

The flurry of negotiations is taking place with lawmakers eager to wrap up their work for the year and adjourn for the holidays.

Obama, Senate Majority Leader Harry Reid, D-Nev., and Republican Leader Mitch McConnell of Kentucky have all said in recent days they believe a deal on tax cuts and unemployment benefits is possible by midweek. If so, that would leave time for the Senate to hold a ratification debate on a new arms control treaty with Russia, which Obama has made a top year-end priority.

Senate Republicans have seemed more willing to hold a ratification debate in recent days as the negotiations over taxes intensified, suggesting at least an implicit link between the two issues in the talks.

Few details of the negotiations were available, including the length of a payroll tax holiday under discussion.

But it appeared increasingly likely that any extension of the Bush-era income tax cuts would be for two years.

Obama and Democrats have long insisted that tax cuts be allowed to lapse for incomes over $200,000 for individuals and $250,000 for couples, saying that would cushion the impact on the deficit.

On the other hand, Republicans want all tax cuts extended permanently, arguing it made no economic sense to raise taxes with the economy still recovering from the recession.

Questions remained about how many concessions Obama could extract from Republicans in exchange for extending current tax rates for high earners, a proposal he opposed. But without action, lawmakers face the prospect of delivering a tax hike to all taxpayers at the end of the year, when the current rates expire and revert to higher pre-2001 and 2003 levels.

Negotiations between the Obama administration and a bipartisan group of lawmakers centered on a two-year extension of current rates.

At the same time, a jump in the unemployment rate to 9.8 percent is putting pressure on Republicans to accede to Obama's demand that Congress extend unemployment insurance for a year. GOP congressional leaders had opposed an extension of benefits without cuts elsewhere in the federal budget.

"I think most folks believe the recipe would include at least an extension of unemployment benefits for those who are unemployed and an extension of all of the tax rates for all Americans for some period of time," Sen. Jon Kyl of Arizona, the Senate's Republican negotiator in the talks, said Sunday.

Central to the deal, White House officials and Democrats said, is an extension of unemployment benefits.

"Without unemployment benefits being extended, personally, this is a nonstarter," said Sen. Dick Durbin of Illinois, the second-ranking member of the Senate Democratic leadership.

Republicans have insisted that any extension of jobless aid be paid for with cuts elsewhere in the federal budget. The White House opposes that, saying such cuts are economically damaging during a weak recovery.

Sen. Orrin Hatch, R-Utah, said Republicans would probably cede that point to the Democrats.

"Let's take care of the unemployment compensation even if it isn't ... backed up by real finances," Hatch said. "We've got to do it. So let's do it. But that ought to be it."

About 2 million unemployed workers will run out of benefits this month if they are not renewed, and the administration estimates 7 million will be affected if the payments are not extended for a year.

Senate Republican leader Mitch McConnell on Sunday said discussions are still under way on a variety of unresolved issues.

Any deal would require the approval of the House and Senate, and the president's signature. Obama told Democratic congressional leaders Saturday that he would oppose any extension of tax rates that did not include jobless benefits and other assistance his administration was seeking.

The short-term tax and spending debate is unfolding even as Congress and the Obama administration confront growing anxieties over the federal government's growing deficits.

A presidential commission studying the deficit identified austere measures last week to cut $4 trillion from the federal budget over the next decade.

The movement toward a possible compromise came after Republicans blocked Democratic efforts in the Senate Saturday to extend the current tax rates on all but the highest income levels. Republicans prefer extending all the tax rates permanently, but that cannot win legislative approval either. Even if it did, Obama would be sure to veto.

Durbin and Kyl spoke Sunday on CBS' "Face the Nation," while Hatch appeared on CNN's "State of the Union" and McConnell on NBC's "Meet the Press."

Copyright 2010 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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