By Thomas Ferraro and Richard Cowan
WASHINGTON | Wed Dec 14, 2011 10:56pm EST
(Reuters) – President Barack Obama and fellow Democrats on Wednesday signaled a willingness to drop a proposed surtax on millionaires, but remained at odds with Republicans in efforts to extend an expiring payroll tax cut for 160 million Americans.
Obama discussed abandoning the surtax, which Republicans have denounced as a levy on “job creators,” at a meeting with Senate Majority Leader Harry Reid and other top Senate Democrats at the White House, party aides said.
One aide said Democrats have not offered to drop the surtax, but have made it clear to Republicans that they are willing to do so to renew the tax cut set to expire on December 31.
“We made a significant step in their direction, but Republicans don’t seem to care whether a tax increase for the middle class is prevented — so we remain at a standoff,” the aide said. “They are not negotiating.”
The tough talk comes amid an end-of-year rush in Congress to find deals on major initiatives beyond the payroll tax cut extension, including one to extend benefits for millions of long-term jobless Americans. Those government payments would begin expiring early next year.
Democrats and Republicans are also fighting over a nearly $1 trillion spending bill to keep several government agencies operating through the fiscal year that ends on September 30.
Without action by Friday at midnight, agencies that deliver health, education, defense, homeland security and other services would have to close, further eroding sagging public confidence in members of Congress who face re-election next year.
Given the lack of progress, the White House called on Congress to pass a short-term funding measure to avert a shutdown. It was not yet clear if lawmakers will comply.
Without elaborating, House Republican Leader Eric Cantor told reporters, “We intend to act to make sure that we don’t allow for there to be a shutdown.”
But many lawmakers are frustrated with the political gridlock that has plagued a sharply-divided Congress all year.
“That is the kind of stuff that is driving the American people bat crazy right now,” said Democratic Senator Claire McCaskill.
Without action by the end of this month, the payroll tax would revert to 6.2 percent from the current 4.2 percent, resulting in an average increase of $1,000 per family. Independent economists have warned that could hurt the country’s fragile economic recovery.
Any setback for the economy would hurt Obama’s re-election chances next November, as he is already struggling in the polls because of voter frustration with high unemployment.
Many Republicans initially were cool to renewing the payroll tax cut, questioning its effectiveness in stimulating a weak economy. But their leaders eventually embraced it as they also looked for ways to attach new job-creation measures.
Democrats have proposed a 1.9 percent surtax on income over $1 million annually to help cover the $120 billion cost of extending the workers’ payroll tax cut for another year. Republicans instead favor extending a pay freeze on federal workers, cutting their pensions and other savings.
Senate Republican Leader Mitch McConnell brushed off the importance of the surtax possibly being dropped.
“They’re not giving up a whole lot,” McConnell told CNBC, noting that there was no chance the surtax would be approved by the House or Senate.
“So I don’t know how far we’re down the path toward making an agreement,” McConnell said.
Still unclear was whether the payroll tax cut extension can be completed this week as leaders had hoped or if lawmakers would have to delay the start of their holiday break.
A possible tradeoffs for dropping the millionaire surtax could be Republicans backing off their demands to reduce jobless benefits and tighten Medicare eligibility.
The surtax proposal has been seen as the Democrats’ main bargaining chip, one they might be willing to give up if Republicans abandoned an effort to speed up a decision by Obama on the Keystone XL oil pipeline project between the United States and Canada.
But there could be other sticking points.
The costs of a compromise payroll tax cut extension and unemployment insurance extension could be covered by cutting pension benefits for federal workers and auctioning more broadcast airwaves controlled by the government.
Lawmakers from both parties also have discussed raising fees investors pay for mortgage transactions involving government sponsored agencies Fannie Mae and Freddie Mac. And there have been discussions about using some savings from winding down the wars in Iraq and Afghanistan.
The Republican-controlled House passed its version of a payroll tax cut bill on Tuesday. It included the provision, opposed by the White House, aimed at accelerating approval of the Keystone project.
Senate Democrats have been trying to vote on the House measure – so it can be defeated and thus clear the way for a new round of negotiations – but Republican leaders have so far blocked that move.