The U.S. Senate's top Democrat said his colleagues areconsidering a two-month extension of an expiring payroll tax cutand extended unemployment benefits if they are unable to strike adeal 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, toldreporters yesterday. “I always have a Plan B.”

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

The proposal would also postpone looming cuts in Medicarereimbursements to doctors, he said. A two-month extension wouldcost $40 billion, according to a Democratic aide who wasn'tauthorized to speak publicly.

The Obama administration supports the notion of a two-monthextension, depending on details of a specific proposal, said anadministration official who wasn't authorized to speak publicly andasked not to be named.

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

Lawmakers have been deadlocked over how to finance an extensionof a 2 percentage point cut in the payroll tax, which financesSocial Security, as well as extended unemployment benefits due toexpire at the end of this month. Republicans have proposed payingfor the plan by paring jobless aid and increasing Medicare premiumsfor wealthier seniors. They also want to attach provisions thatwould expedite construction of a Canadian oil pipeline toTexas.

At the same time, lawmakers said they have agreed to approve aseparate $1 trillion budget measure to fund the day- to-dayoperations of federal agencies, heading off a threatened partialgovernment shutdown. A stopgap measure keeping the governmentoperating expires tonight. The House plans to vote on the1,200-page spending bill today, with the Senate to follow.

“In spite of many unnecessary obstacles, it is good to see thatresponsible leadership and good governance can triumph,” HouseAppropriations Committee Chairman Hal Rogers, a KentuckyRepublican, said in a statement.

Spending Bill Ensnared

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

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

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

The spending bill combines nine overdue appropriations measuresestablishing budgets for hundreds of programs across 10 Cabinetagencies.

Along with another measure approved last month, it would capoverall “discretionary” spending at $1.043 trillion, according toRepublicans' summary of the legislation. That would be $7 billionless than last year and the second consecutive year in whichappropriations have declined.

More than half of the bill is comprised of the DefenseDepartment's budget, which would increase by $5 billion, or 1percent, to $518 billion. That would be a fraction of the annualincreases the agency typically receives. Over the past decade, itsbudget 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 anestimated $11 billion over the next decade, in part by tightereligibility standards. The administration's Race to the Topprogram, which awards competitive grants to schools, would be cutby 20 percent.

Foreign aid would decline, with the U.S. Agency forInternational Development's budget cut by 17 percent. TheEnvironmental Protection Agency would be cut by 3 percent, on topof reductions approved earlier this year. The GovernmentAccountability Office, the investigative arm of Congress, would seea 6 percent reduction. The Internal Revenue Service would be cut by2 percent.

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

Republicans prevailed with language barring public funding ofabortions in Washington, the nation's capital. They also killed aDemocratic proposal to increase the security fees charged toairline passengers. Airlines are charging more for checked baggage,Democrats complained, which was prompting more travelers to bringcarry-on luggage and increasing the workload for the government'ssecurity screeners.

Bloomberg News

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