Senate strikes deal on short term payroll tax cut package

Senators also agreed to back massive spending measure funding most agencies for 2012.

The Senate will approve a two-month extension of a payroll-tax holiday for workers Saturday after talks of a longer extension collapsed Friday night.

The bill would also include a short extension of unemployment benefits and a so-called "doc fix" preventing Medicare physicians from taking a 27-percent pay cut next year The House is set to take up the measure when it returns Monday morning. The Senate will also approve a massive spending bill that funds the bulk of government operations for the rest of the fiscal year, which started Oct. 1. The House approved the measure Friday afternoon before adjourning for the weekend.

The temporary payroll-tax measure would include a House-passed provision requiring a White House decision on whether to allow the controversial Keystone XL pipeline within 60 days. Absent would be a provision delaying regulations on industrial boilers - the so-called Boiler MACT rule issued by the Environmental Protection Agency. President Obama last week said he would not accept the Keystone provision but Democrats said they will argue, as Republicans have, that it does not actually bind the White House, allowing it to put off the project if the president declares it not to be in the national interest.

The White House signed off on the package in a statement Friday night. "The President said that Congress cannot go home without preventing a tax increase on 160 million hardworking Americans, and the deal announced tonight meets that test, stated Dan Pfeiffer, White House communications director. "This is an important step towards enacting a key provision of the President's American Jobs Act and a significant victory for the American people and the economy, because as independent analysts have said, failing to extend this tax cut would have had a damaging effect on our recovery and job growth. The President urges Congress now to finish up their business for the American people."

The shift to a two-month bill came just hours after Democratic aides said they were close to a deal on a longer-term extension.

The Senate on Friday night also unanimously approved a House-passed 24-hour continuing resolution funding most government operations, despite Senate leaders' assertion Friday morning that none was needed to avert a partial government shutdown. The CR was slated to expire expire at midnight Friday.

Aides in both parties said the larger deal broke down because the sides were unable to agree on offsets to cover the total cost of the bill. Rather than haggle into next week, Democrats decided to recess and "fight another day," said Senate Majority Whip Dick Durbin, D-Ill.

Even as they blamed Republicans for the failure to reach a longer deal, Democrats argued they derive a political advantage from continuing the debate. The issue is set to loom large in February.

"We feel that two months from now we're in really good shape because now the fight is on the payroll tax, which is something where we have strength," said Sen. Charles Schumer, D-N.Y., who heads Senate Democrats' policy and messaging office. "People want the payroll tax reduction. And if [Republicans] keep opposing it and opposing it, it's gonna hurt them."

Schumer said Democrats will renew a push for a surtax of incomes of more than $1 million dollars a year, despite their decision this week not to insist on the "millionaire's tax" as a way to pay for the payroll-tax cut extension.

"That is a going to come back and back and back," he said.