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Payroll Tax Cut Deal To Include Controversial Keystone Pipeline (UPDATED)

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WASHINGTON -- Senate negotiators agreed Friday to a two-month deal to extend unemployment benefits and the middle-class payroll tax cut, but Democrats had to swallow a demand by Republicans to include language on the controversial Keystone pipeline.

It was not immediately clear, however, that House Republicans who left Washington for the weekend would go along with the compromise.

The estimated $30 billion deal also includes $4 billion to prevent doctors from having their reimbursement rates slashed by Medicare.

The White House announced its support for the Senate compromise later Friday night, despite President Barack Obama having previously threatened to veto any payroll tax cut plan that was tied to the Keystone pipeline. Republicans insisted, however.

"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," White House communications director Dan Pfeiffer said in a statement.

"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."

A Senate vote on the year-end package is expected Saturday, as well as a vote to fund the government for the rest of the fiscal year. The tax cut is fully paid for over 10 years by hiking fees on banks that do business with Freddie Mac and Fannie Mae, raising about $38 billion.

Republicans hailed the decision to add the Canada-to-Texas pipeline as a major victory for their side, arguing that it forces Obama to make a quicker decision on moving forward with the 1,700-mile-long project to transport more oil from northern tar sands to the Gulf Coast. Obama angered some in the fall by delaying approval of the pipeline until 2013, citing a need to work out environmental concerns.

The bill’s language requires the White House to make a decision within 60 days.

"This bill will stop President Obama's delaying tactics," Sen. Richard Lugar (R-Ind.) said in a statement. "This is a tremendous victory for our security and for creating jobs. It is absolutely incredible that President Obama wants to delay a decision until after the 2012 elections apparently in fear of offending a part of his political base and even risking the ire of construction unions who strongly support the project."

If the compromise passes the Senate, as expected, it still isn’t a done deal since House Republican leaders have previously expressed reluctance to accept a two-month plan.

"We'll have to talk to members," said Michael Steel, a spokesman for House Speaker John Boehner (R-Ohio).

Republicans say the pipeline will create 20,000 jobs, though other estimates place it at more like 6,500.

While Democrats accepted the pipeline provision, others they opposed were dropped, including one that sought to deregulate emissions from boilers.

Another concession that Democrats appear to have made is that the payroll tax cut is only 2 percent, instead of the 3.1 percent they were seeking.

A White House official dismissed the idea that Republicans scored a victory by forcing Keystone into the tax deal. For one thing, said the official, the Keystone language only requires that Obama make a decision on the pipeline versus requiring construction on it. In addition, the president was already criticized for delaying the project until 2013, so another round of attacks on the issue wouldn't be new.

"They didn't get a pipeline and they didn't get a new weapon they can use against the president. They didn't get the pay-fors that they wanted," the official said of Republicans. "At the end of the day, we have already made the calculation that the president owns this decision…. We've already taken the political hit. You can't sort of take the hit again. We've already taken it."

"We feel good about the way this has shaken out,” added the official.

The White House is also banking on the idea that another fight on the payroll tax in two months works in their favor. Their thinking is that the closer it gets to the November elections, the more difficult it becomes for Republicans to oppose a tax cut that impacts 160 million middle-class people.

Senate Democrats expressed similar thoughts.

"For the next two months, Democrats will work to extend the middle-class tax cut through the end of the year," said Senare Majority Leader Harry Reid said. "Republicans can either join us, or explain why they want middle-class families’ taxes to go up.”

A Senate Democratic leadership aide said that Democrats had pushed for the full year-long extension, but claimed Republicans were trying to pay for the estimated $200 billion cost of the full package by using some non-starters from the House Republican plan, including charging people whose earnings were $85,000 and up more for Medicare. The GOP plan also sought cuts in the federal workforce, and cut spending for preventive medicine in the health care reform law.

A Senate source had said the two sides were in agreement on how to pay for about $100 billion of the cuts before the start of Friday's talks. The sides could not work out how to pay for the rest.

But a Republican aide said Democrats never offered enough savings to pay for the whole plan. And the aide insisted that the GOP Senators abandoned the House Medicare option, which would have raised more than $30 billion.

Still, Democrats seemed intent to brand the GOP as enemies of Medicare.

"If Republicans are going to make cutting Medicare benefits the price of extending a middle class tax cut for one year, we'll take the two month extension and gladly have this fight for American families again in February," a leadership aide said.

Update: 10:15 p.m. This story has been rewritten to add more details.

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