Senate OKs $1T budget bill, payroll tax cut for 2 months

Washington • The Senate voted Saturday to temporarily avert a Jan. 1 payroll tax increase and benefit cutoff for the long-time unemployed, but forcing a reluctant President Barack Obama to make an election-year choice between unions and environmentalists over whether to build an oil pipeline through the heart of the country.

With the still-reeling economy serving as a backdrop, the Senate's 89-10 vote belied a tortuous battle between Democrats and Republicans that produced the compromise two-month extension of the expiring tax breaks and jobless benefits and forestalled cuts in doctors' Medicare reimbursements.

It also capped a year of divided government marked by raucous partisan fights that tumbled to the brink of a first-ever U.S. default and three federal shutdowns, only to see eleventh-hour deals emerge. It ensured that the two sides would revisit the payroll tax cut early next year as the fights for control of the White House and Congress heat up.

By 67-32, senators gave final congressional approval to a separate $1 trillion bill financing the Pentagon and scores of other federal agencies through next September. That measure avoided a shuttering of government offices that otherwise would have occurred this weekend when temporary financing expired.

The tax legislation delivers tax cuts and jobless benefits that some Republicans opposed. It also represents a rebuff of Obama's original demands for a yearlong payroll tax reduction for 160 million workers that was to be even deeper than this year's cut, extended to employers and paid for by boosting taxes on the highest-earning Americans.

The measure's $33 billion price tag will be paid for instead by raising fees that government-backed Fannie Mae and Freddie Mac will charge to back new mortgages or refinancings, beginning next year. When fully phased in, those increases could cost a person with a $200,000 mortgage about $17 a month.

Despite the changes, Obama praised the Senate for passing the bill and prodded the Republican-run House to give it final approval in a vote expected early next week. He exhorted lawmakers to extend the tax cuts and jobless aid for the entire year, saying it would be "inexcusable" not to.

"It should be a formality, and hopefully it's done with as little drama as possible when they get back in January" from their holiday recess, he said.

Senate Republicans voted 39-7 in favor of the payroll tax measure, suggesting that many House GOP lawmakers might also back it. Of the 51 Senate Democrats and two independents who usually side with them, only three voted "no."

The Senate adjourned for the year after its votes Saturday.

While Obama and Democrats used the fight to portray themselves as defenders of beleaguered middle- and lower-income people, Republicans used it to cast themselves as champions of job creation.

Headlining that was a provision they inserted forcing Obama to make a decision within two months on whether to allow construction of the proposed 1,700-mile Keystone XL pipeline, which is to deliver up to 700,000 barrels of oil daily from tar sands in Alberta, Canada, to refineries in Texas. The language requires him to issue the needed permit unless he declares the pipeline would not serve the national interest.

Unions have clamored for the thousands of jobs the project could create. Environmentalists have decried the huge amounts of energy it would take to extract the oil. Obama originally announced he was delaying a decision until 2013, which would have allowed him to avoid choosing between two Democratic constituencies before Election Day next November.

When the House inserted the language into its version of the payroll tax bill this month, Obama said he would "reject" the legislation if it retained the Keystone provision. He abandoned that stance this past week as GOP leaders said they would insist on keeping the Keystone language and the final deal jelled.

"The only thing standing between thousands of American workers and the good jobs this project will provide is a presidential decision," said Senate Minority Leader Mitch McConnell, R-Ky.

An administration official said Friday that Obama would almost surely refuse to grant the permit, a stance echoed Saturday by congressional Democrats.

"We feel we're giving them the sleeves off a vest," said Sen. Charles Schumer, D-N.Y.

Democrats said when Congress revisits the issue of renewing the tax cuts and jobless benefits early next year, they would win the political battle because they would be viewed as protecting peoples' household budgets.

Republicans, though, said they would once again focus the fight on jobs, with some predicting they would try adding provisions to repeal pollution curbs and other government regulations that they say make it harder for companies to hire people.

"There are lots of issues Republicans are interested in as job creators that will still be alive in March," said Sen. Roy Blunt, R-Mo.

The tax bill would renew this year's 4.2 percent payroll tax through February, preventing the rate from bouncing back to its normal 6.2 percent on New Year's Day. Obama pushed that cut through Congress a year ago as a way to help spark the economy by leaving more money in people's pockets.

A $50,000-a-year wage earner would save about $170 during next year's first two months under the bill the Senate approved Saturday.

Obama had proposed reducing the payroll tax employees pay to 3.1 percent next year. The levy is the chief source of revenue for Social Security.

For two more months, the tax measure would also continue current jobless benefits that provide a maximum 99 weeks of coverage for people who have been out of work the longest. Without any extension, the White House said, 2.5 million people would have lost coverage by the end of February.

The bill also prevents a 27 percent cut in Medicare reimbursements for doctors that might have induced some to stop treating the program's elderly beneficiaries.

The spending legislation carries out budget cuts across government that Republicans won earlier this year and includes GOP provisions blocking energy efficiency and coal dust requirements. Democrats fought off Republican language that would have blocked limits on greenhouse gases and hazardous emissions from utility plants and other sources.

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Associated Press writer Andrew Taylor contributed to this report. —

Highlights of the $1 trillion-plus 2012 spending legislation

$518 billion • for the Pentagon's core budget, a 1 percent boost, excluding military operations overseas.

$115 billion • for Pentagon war costs in Iraq and Afghanistan, $43 billion less than 2011 costs.

$7.2 billion • to sustain and modernize the U.S. nuclear arsenal.

$11.8 billion • for the IRS, an almost 3 percent budget cut.

$39.6 billion • for homeland security programs, a 5 percent cut, though border security and immigration enforcement are increased.

$8.4 billion • for the EPA, a 6 percent cut from the president's request.

$4.3 billion • for the Indian Health Service, a 6 percent increase.

$30.7 billion • for health research, a 1 percent increase.

$14.5 billion • for Title I grants to schools, virtually the same as last year.

$11.6 billion • for grants to school districts for special-needs children.

$4.3 billion • for Congress' own budget, a 5 percent cut.

$122.2 billion • for veterans programs.

$3.5 billion • for low-income heating and utility subsidies, a cut of about 25 percent.

$53.3 billion • for foreign aid and the State Department's budget.

$8.1 billion • for disaster aid.

Reforms to the Pell Grant program • that maintain the maximum award at $5,550 but limit the number of semesters the grants may be received and make income eligibility standards more strict. —

What the legislation does

Extends • 2-percentage-point cut in the Social Security payroll tax through Feb. 29. Cost: $20.4 billion.

Renews • jobless benefits for the long-term unemployed through Feb. 29. Cost: $8.4 billion.

Prevents • 27 percent cut in Medicare payments to doctors and extends miscellaneous health policies through Feb. 29. Cost: $4.1 billion.

Increases • home loan guarantee fees charged to mortgage lenders by Fannie Mae, Freddie Mac and the Federal Housing Administration by one-tenth of 1 percentage point. Raises $35.7 billion over 10 years.

Requires • President Barack Obama to approve the Keystone XL oil pipeline within 60 days unless he declares the project would not serve the national interest.