Tax, jobs bill blocked in Senate

WASHINGTON (Reuters) - A Democratic bill to extend jobless benefits and raise taxes on investment fund managers failed a key vote in the Senate on Thursday, dealing a blow to President Barack Obama's push to boost the economy.

The bill would have extended popular business tax breaks, stopped a 21 percent Medicare pay cut for doctors treating elderly patients and extended extra Medicaid money to cash-strapped states. Democratic leaders failed to muster the 60 votes needed to overcome solid Republican opposition to the bill, which would have added about $55 billion to the deficit over 10 years. The Senate voted 56-40 against the measure.

The defeat sent Democratic leaders back to the negotiating table to try to win support from a few moderate Republicans.

"We're not going to give up," said Democratic Leader Harry Reid. It was unclear when the Senate would take up the measure again.

Senate Finance Committee Chairman Max Baucus said that "everything would be on the table" in an effort to try to win support from at least a few Republicans.

Republican opponents argued that the bill would add billions to an already bloated $1.4 trillion budget deficit. Democratic leaders had scaled back the bill from a version that failed a test vote earlier this week. That version would have added about $80 billion to the deficit over 10 years.

The Senate earlier in the day had rejected a Republican alternative that would have been paid for by across-the-board spending cuts for non-defense programs and freezing pay for federal workers.

"Americans are frustrated with the amount of spending and borrowing that we're doing around here," said Senate Republican Leader Mitch McConnell.

The deficit and $13 trillion national debt are becoming major issues in the November midterm congressional elections in which Republicans hope to gain control of Congress. Obama over the weekend had urged lawmakers in a letter to move swiftly to approve new measures to "spur job creation and build momentum toward recovery."

The House of Representatives passed its version of the tax bill last month. On Thursday the House also approved a $30 billion plan to boost capital at independent community banks to encourage them to lend money to small businesses, which account for a large portion of jobs growth in the United States.

REVISIONS IN THE SENATE

Democratic leaders had scaled back their earlier bill in order to overcome growing concerns about its impact on the deficit. They removed a $25 a week unemployment insurance benefit increase that had been added in last year's economic stimulus plan.

In the midst of the devastating oil spill in the Gulf of Mexico, the bill also raised the oil spill liability trust fund tax to 49 cents a barrel from 8 cents a barrel.

Democrats had also modified the investment fund managers' tax, called carried interest, to address concerns voiced by some Senators. The provision would tax 75 percent of investment fund managers income at ordinary tax rates, with an exception for assets held at least 5 years, of which only 50 percent would be taxed at ordinary income rates.

Fund managers currently pay low 15 percent capital gains taxes on much of their earnings.

Democrats had also revised a measure dealing with small business taxes in hopes of winning support from Senator Olympia Snowe. But Snowe joined her fellow Republicans in voting against the bill.

(Reporting by Donna Smith; editing by Anthony Boadle)