Way cleared for tax cut bill; energy breaks added

WASHINGTON -- The White House and key lawmakers cleared the way Thursday night for swift Senate action to avert a Jan. 1 spike in income taxes for nearly all Americans, agreeing to extend breaks for ethanol and other forms of alternative energy as part of the deal.

Tax provisions aimed at increasing production of hybrid automobiles, biodiesel fuel, energy-efficient homes, coal and energy-efficient household appliances would be extended through the end of 2011 under the bill.

Debate on the expanded measure began almost immediately. While there is no precise timetable for passage, a test vote was set for Monday afternoon that appears likely to demonstrate overwhelmingly support for the legislation, which supporters say would help accelerate a sluggish recovery from recession.

The events unfolded as the White House predicted that the agreement between President Barack Obama and top Republicans would clear by year's end -- even though House Democrats voted Thursday not to allow it to reach the floor without changes to scale back tax relief for the rich.

"If it's take it or leave it, we'll leave it," said Rep. Lloyd Doggett, D-Texas, after a closed-door meeting in which rank-and-file Democrats chanted, "Just say no."

"The deal will get passed," said presidential press secretary Robert Gibbs. There were no predictions to the contrary among senior Democrats on either side of the Capitol.

As announced by Obama on Monday, the deal would extend tax breaks at all income levels that are due to expire on Jan. 1, renew a program of jobless benefits for the long-term unemployed that is due to lapse within days and implement a one-year cut in Social Security taxes.

At the insistence of Republicans, it also includes a more generous estate tax provision. That, in turn, infuriated Democrats already unhappy with Obama for agreeing to extend personal tax cuts at incomes over $200,000 for individuals and $250,000 for couples.

The two-year cost of the plan, estimated at about $850 billion, would further swell record federal deficits.

Despite significant criticism from fellow Democrats, Obama has said the sweeping measure is necessary to help the struggling economy recover from the worst recession in decades. With unemployment at 9.8 percent, a top White House official warned Democratic critics Tuesday they risk sending the economy back into recession if they block the measure.

In the Senate, the emergence of bipartisan legislation also indicated progress for the White House and Senate Majority Leader Harry Reid, D-Nev., toward possible year-end passage of other major items on their agenda.

Obama has made ratification of a new arms control treaty with Russia a top priority. The White House is also pressing Reid to try once more to end the Pentagon's 17-year ban on openly gay members of the military.

Republicans have vowed to block action on all legislation until a tax bill and a year-end government spending bill have been resolved.

Senate Republican leader Mitch McConnell has said he expects most of his rank and file to support the huge tax bill. Prominent House Republicans back it, too, although they have generally refrained from speaking out at a time when doing so would divert attention from the spectacle of Obama at odds with lawmakers of his own party.

Rep. John Boehner of Ohio, in line to become House speaker when Republicans take power in January, "supports the framework as agreed to by" Obama and McConnell and spoke with the president about it over the weekend, a spokesman said Thursday.

Rep. Paul Ryan of Wisconsin, whose views on economic issues are influential among House Republicans, also swung behind it. "While I have concerns with some specific aspects of the plan, I support the proposed framework to avert further economic hardship and provide a first step to restore the foundations for sustained growth and job creation," he said in an interview.

Among the energy tax provisions added was an extension of the current 45-cent per gallon subsidy for ethanol, at a cost to the Treasury estimated at nearly $5 billion. The issue is of particular interest to lawmakers from Midwestern states with grain crops.

The changes did nothing to ease the opposition among some critics, though. Liberal Sen. Bernie Sanders, I-Vt., attacked the measure's tax breaks for the wealthy as a threat to the middle class.

The energy-related tax provisions will presumably increase support for the measure in the House, officials said Democrats there are eager to see a scaling back of a provision that would allow estates as large as $5 million escape taxation.

Speaker Nancy Pelosi, D-Calif., said, "That was a bridge too far for many of our members" already upset about Obama's decision to bow to Republican demands for extending tax cuts on individuals making over $200,000 and couples earning more than $250,000.

Under the estate tax provision, the first $5 million of a couple's estate could pass to heirs without taxation, and an additional $5 million for the spouse. The balance would be subject to a 35 percent tax rate.

According to a Tax Policy Center estimate based on census data, that would mean only about 3,500 estates would be liable for taxes in 2011, out of more than 2.5 million forecast to be filed. Barring legislation, about 44,000 estates would be subjected to taxation in 2011, the groups said.

Some Democratic officials suggested a relatively minor change to the estate tax portion of the Obama-GOP deal might assuage critics of the plan. If accepted, however, it could come at a price in the form of additional concessions to Republicans, several officials said.

Vice President Joe Biden has told Democrats in closed-door meetings this week that they are free to oppose the agreement but it might unravel if they do, according to officials familiar with the discussions.

Whatever the disagreement over the economic wisdom of renewing tax cuts for the wealthy, the legislation also marks the emergence of a new era of divided government following midterm elections in which the Republicans won power in the House and gained seats in the Senate.

Privately, several House Democrats complained that the White House had not consulted them while negotiating a deal with McConnell.

The House passed a measure last week that would have let the tax cuts lapse at higher incomes, but Senate Republicans blocked it on Saturday -- with the knowledge the president had already agreed he was ready to sign a measure that was more to their liking.

Democrats and Republicans have spent two years gridlocked over the question of extending the expiring tax cuts, and Obama has characterized his compromise with Republicans as a temporary, two-year concession on a policy he opposes.

House and Senate Democrats debated privately in the weeks before the elections whether to hold votes on the issue. They decided not to at that time after lawmakers who were seeking re-election said they would prefer not to have go on record if it meant Republicans would attack them for raising taxes on small businesses.

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Associated Press writers Charles Babington and Stephen Ohlemacher contributed to this report.