Lawmakers reach tentative deal to extend payroll tax break

Reporting from Washington —  Despite discomfort in the Republican ranks, House and Senate negotiators reached a deal in principle early Thursday to extend a payroll tax break, continue unemployment benefits and ensure that Medicare doctors do not get a pay cut this year.

As talks continued past midnight Wednesday — the ostensible deadline — at one point a source with knowledge of the private session confirmed a deal had been reached. But about an hour later, the source cautioned that some details remained to be worked out.

The chief negotiators, Democratic Sen. Max Baucus of Montana and Republican Rep. Dave Camp of Michigan, holed up in the Capitol.

Finally, at nearly 1 a.m., they emerged, saying they had a deal in principle and the final language should be ready in the morning.

Generally under House rules, the proposal should have been made public by midnight so it would be available for lawmakers to study three days before the vote.

Baucus hailed the deal.

“This agreement will deliver real tax relief to 160 million Americans and help our economy continue to grow,” he said in a statement. The payroll tax cut amounts to about $20 a week for the average worker.

“Folks being able to successfully work together and get things done is becoming rarer and rarer,” Baucus said. “But today we were able to show that it really can be done when you put your mind to it.”

One of the issues holding up the agreement late Wednesday was Republicans’ insistence on a provision allowing Medicare to pay for services at newly built doctor-owned hospitals. Under the nation’s new healthcare law, such hospitals would no longer be reimbursed because their services were deemed too costly.

Another issue involved federal workers’ pensions.

Congressional leaders hope that both chambers can vote on the package by week’s end — before lawmakers adjourn for a weeklong recess. They are scheduled to return Feb. 27, days before the tax cut expires.

Without action, taxes would rise March 1, long-term unemployment benefits would end, and doctors’ pay would be slashed by 27.4% — politically toxic outcomes all sides hope to avoid.

The stalemate arose in December, when tea-party-linked House Republicans rejected extending the payroll tax, which trims 2 percentage points from workers’ Social Security taxes. Under withering public criticism and Congress’ collapsing poll numbers, they agreed to extend it through this month.

Several Republicans said earlier Wednesday that although they disapproved of the emerging compromise, they were reluctant to keep fighting. President Obama has continued to portray Republicans as blocking the tax break for workers.

“One thing we know: December was a debacle,” said Sen. John McCain (R-Ariz.). “We don’t want to repeat that.”

Rank-and-file Republicans have found little to like in the package since GOP leaders announced earlier in the week that they would drop their insistence that the tax cuts be paid for by spending reductions elsewhere.

GOP leaders said they had little choice after Democrats showed little willingness to make the spending cuts Republicans wanted.

Republican Rep. Pete Sessions of Texas, who as chairman of the party’s campaign committee is working to keep the House GOP majority this fall, said he still thinks the payroll tax break is “a bad idea.” But he found value in resolving the issue.

“I think at some point the American people are looking to us to find a way to move on, move together,” Sessions said.

The deal would extend the payroll tax break through the rest of the year.

The $100-billion cost of the tax cut would not be paid for with Republican-supported spending cuts, nor with higher taxes on the wealthy, as Democrats had wanted. Instead, the lost revenue for the Social Security fund would be replaced from the general fund, essentially adding to the deficit.

The other provisions in the package would be offset with a combination of new revenue and spending cuts.

The estimated $30 billion needed to continue long-term unemployment benefits would be covered partly by new revenue from auctioning off bandwidth in the federal communication spectrum, which wireless providers want to expand their services.

The remainder would come from a reduction in the government’s contribution to federal workers’ retirement accounts. Workers would be asked to contribute more toward their retirement, according to aides familiar with the package.

Republicans had focused on making changes to the unemployment insurance program, which some in the party contend is a drag on the economy and keeps jobless Americans from finding work.

Under the deal, the unemployment program would see the guarantee of up to 99 weeks’ benefits in the most hard-hit states reduced to 73 weeks by year’s end. Residents in states with lower jobless rates could receive a maximum of about 63 weeks of aid.

States would be allowed to drug test those seeking unemployment benefits if the workers had been fired for substance abuse or if their new jobs required drug testing.

Advocates for the unemployed have resisted drug testing provisions and said most states already prevented drug offenders from qualifying for benefits. Furthermore, companies in industries that require testing provide the tests. The new provisions would open the door to broader state involvement if states decided to pay for such services.

Republicans lost their bid to require jobless Americans to work toward a high school diploma before they could receive unemployment insurance.

The estimated $20 billion cost of maintaining doctors’ Medicare pay rates would come from cuts to health accounts, including one that would fund prevention and public health services under the new healthcare law, as well as another that would reduce the reimbursement rate for hospitals that incur debt from certain patients.

After the deal was announced early Thursday, Senate Majority Leader Harry Reid (D-Nev.) welcomed what he hoped was a new era of bipartisan cooperation.

“Everything should not have to be a fight, and I am glad that most of my Republican colleagues put the interests of the middle class ahead of politics to forge this agreement,” he said in a statement. “Americans expect us to put our differences aside and find common ground.”

lisa.mascaro@latimes.com