The U.S. Senate's top Democrat said his colleagues are considering a two-month extension of an expiring payroll tax cut and extended unemployment benefits if they are unable to strike a deal on a longer-term plan with Republicans.

“We'll only do that if what we're working on doesn't work out,” Senate Majority Leader Harry Reid, a Nevada Democrat, told reporters yesterday. “I always have a Plan B.”

“I hope we don't get there, but if we do, what the two-month would accomplish is make sure people continue to get the payroll tax holiday and also the unemployment benefits,” Reid said.

The proposal would also postpone looming cuts in Medicare reimbursements to doctors, he said. A two-month extension would cost $40 billion, according to a Democratic aide who wasn't authorized to speak publicly.

The Obama administration supports the notion of a two-month extension, depending on details of a specific proposal, said an administration official who wasn't authorized to speak publicly and asked not to be named.

Democrats and Republicans have discussed a “fallback” plan if they are unable to reach a deal on a one-year extension, said Don Stewart, a spokesman for Senate Minority Leader Mitch McConnell, a Kentucky Republican. “Talks are continuing,” said Stewart.

Lawmakers have been deadlocked over how to finance an extension of a 2 percentage point cut in the payroll tax, which finances Social Security, as well as extended unemployment benefits due to expire at the end of this month. Republicans have proposed paying for the plan by paring jobless aid and increasing Medicare premiums for wealthier seniors. They also want to attach provisions that would expedite construction of a Canadian oil pipeline to Texas.

At the same time, lawmakers said they have agreed to approve a separate $1 trillion budget measure to fund the day- to-day operations of federal agencies, heading off a threatened partial government shutdown. A stopgap measure keeping the government operating expires tonight. The House plans to vote on the 1,200-page spending bill today, with the Senate to follow.

“In spite of many unnecessary obstacles, it is good to see that responsible leadership and good governance can triumph,” House Appropriations Committee Chairman Hal Rogers, a Kentucky Republican, said in a statement.

Spending Bill Ensnared

The spending bill had become ensnared in the battle over the payroll tax, with Democrats withholding the budget bill because they feared that, if it passed, the Republican- controlled House would adjourn for the year. That might have forced Senate Democrats into a take-it-or-leave-it choice on Republicans' version of the payroll tax plan.

The payroll tax and budget measure are two of the last major items Congress is likely to consider before adjourning for the year for its Christmas recess.

Lawmakers made some last-minute changes to the “omnibus” spending measure, including, in a victory for President Barack Obama, killing a provision attacking his Cuba policies. Republicans had sought to block his decision to loosen restrictions on travel and sending money to the Communist country.

The spending bill combines nine overdue appropriations measures establishing budgets for hundreds of programs across 10 Cabinet agencies.

Along with another measure approved last month, it would cap overall “discretionary” spending at $1.043 trillion, according to Republicans' summary of the legislation. That would be $7 billion less than last year and the second consecutive year in which appropriations have declined.

More than half of the bill is comprised of the Defense Department's budget, which would increase by $5 billion, or 1 percent, to $518 billion. That would be a fraction of the annual increases the agency typically receives. Over the past decade, its budget has grown by 75 percent, not including war funding.

Many programs would face cuts. Pell grants, which help low- income families send children to college, would be cut by an estimated $11 billion over the next decade, in part by tighter eligibility standards. The administration's Race to the Top program, which awards competitive grants to schools, would be cut by 20 percent.

Foreign aid would decline, with the U.S. Agency for International Development's budget cut by 17 percent. The Environmental Protection Agency would be cut by 3 percent, on top of reductions approved earlier this year. The Government Accountability Office, the investigative arm of Congress, would see a 6 percent reduction. The Internal Revenue Service would be cut by 2 percent.

Democrats fended off a number of Republican initiatives, including proposals taking aim at environmental regulations and cutting federal funding for Planned Parenthood and NPR, the syndicator of public radio stations.

Republicans prevailed with language barring public funding of abortions in Washington, the nation's capital. They also killed a Democratic proposal to increase the security fees charged to airline passengers. Airlines are charging more for checked baggage, Democrats complained, which was prompting more travelers to bring carry-on luggage and increasing the workload for the government's security screeners.

Bloomberg News

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Lawmakers Look at 2-Month Fix

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