WASHINGTON (Reuters) - A deal that President Barack Obama struck with Republicans to extend tax cuts for nearly every working American and spur job growth sailed through the Senate on Wednesday.
The Senate passed the legislation 81 to 19, with Democrats and Republicans delivering a rare display of bipartisanship.
The drama now moves to the House of Representatives, where many of Obama's fellow Democrats strongly oppose the measure as favoring the wealthy and are still angry with him for cutting the deal with Republicans without them.
The House will start debate on the tax deal on Thursday, a senior Democratic aide said, and is likely to approve it.
The legislation would extend for two years the income tax cuts enacted under Republican former President George W. Bush, with Democrats backing off their earlier fervent opposition to extending the cuts for the richest Americans. The Bush-era cuts are due to expire at the end of 2010 unless Congress acts.
The measure also would prevent a spike in taxes on capital gains and dividends, renew long-term unemployment insurance, and provide new tax relief for students, working families and businesses.
House Democrats are becoming more resigned to passage of the $858 billion package. Experts predict that the measures will probably boost economic growth but add to the $1.3 trillion budget deficit, which has unsettled the bond market.
"At the end of the day I think we are going to have to pass a bill," said liberal Democratic Representative Henry Waxman.
Most of the 255 House Democrats may oppose the overall tax package, but it is expected to be approved with overwhelming support among the chamber's 179 Republicans.
Obama called on the House to approve the bill "as soon as possible" to avoid tax increases across the board in January.
Many economists predict the tax package could add up to 1 percentage point to economic expansion next year, due partly to a one-year cut in the payroll tax and removal of uncertainty about taxes in general.
Obama's position on taxes marked a huge shift in the debate from earlier this year when he and his fellow Democrats fought against renewing tax reductions for the wealthiest Americans -- those with household incomes above $250,000 -- while supporting continuation of the cuts for middle-class taxpayers.
At the time, they said that with budget deficits at record levels, the United States could not afford to give the tax breaks to the wealthiest.
But with Republicans drawing a line in the sand on the issue and scoring major victories in November 2 congressional elections -- taking control of the House and making gains in the Senate -- Obama acquiesced on tax cuts for upper-income Americans.
Democrats did win their desired extension of unemployment benefits that were expiring for millions of people shut out of jobs in the lackluster economy.
In a parallel effort to get growth going, Obama met with top company CEOs and prodded them to dip into corporate cash piles to increase investment and U.S. hiring.
Worries about the tax bill's potential impact on the federal deficit prompted a two-day sell-off of U.S. Treasury bonds last week. On Wednesday treasuries prices fell as traders remained uncertain whether the selling pressure that has roiled the market in recent weeks has neared an end.
The measure passed by the Senate leaves out renewal of a popular bond program expiring this month, Build America Bonds, which funds infrastructure projects, favored by Democrats, cities and investors. It leaves intact an ethanol tax credit, thwarting efforts by some lawmakers to weaken it.
Particularly irksome to Democrats is a provision raising the exemption threshold for the estate tax from the 2009 policy of $3.5 million to $5 million, and cutting the tax rate from 45 percent to 35 percent.
"It's hard to believe they think it's wise to give a windfall to heirs such as Paris Hilton," senior Democratic Representative Chris Van Hollen wrote in the Washington Post.
Democrats will likely try to change the tax bill with an amendment on the estate tax, though it is unclear if that could pass. MF Global analyst Chris Krueger said such a vote would be symbolic.
Representative Earl Pomeroy, the Democrat sponsor of a steeper estate tax proposal, told Reuters it was "unclear" if such a vote would pass.
He said Democrats will try because "some things are worth fighting for." He then noted: "I will say this ... people want to get home and, you know sometimes, heading to the gate is a pretty powerful impetus to pass packages."