U.S. tax fight gets nastier - govt shutdown looms
* Republicans block Senate action on tax cut bill
* Boehner wants Senate to propose own bill
* White House says still confident of 11th hour deal.
By Thomas Ferraro and Richard Cowan
WASHINGTON, Dec 14 (Reuters) - The United States on Wednesday faced the prospect of an imminent government shutdown for the third time this year as a year-end fight between Republican and Democratic lawmakers in Congress over taxes and spending turned nastier.
Democrats, led by President Barack Obama, are refusing to sign off on a bipartisan $1 trillion government funding bill that would keep federal agencies operating beyond Friday. They first want Republicans to agree to a compromise deal to extend a payroll tax cut for 160 million Americans.
The Republican-led House of Representatives passed its version of the payroll tax cut bill along a mostly party-line vote on Tuesday, but Democratic Senate Majority Leader Harry Reid has vowed to kill it as soon as he can bring it to a vote.
The Republican bill proposes to pay for the $120 billion cost of the payroll tax cut largely by freezing federal pay and shrinking the size of the government work force. Democrats reject that and are instead proposing a surtax on millionaires.
Republicans in the Senate blocked a Democratic bid on Wednesday to quickly reject the House bill, which also includes a provision to speed up a decision on an oil pipeline that the White House has delayed for further environmental studies.
Senate Republican leader Mitch McConnell stymied Reid's effort to dispose of the Republican bill, saying he wanted to turn first to the government funding bill.
In an exchange on the Senate floor, Reid objected to McConnell's move, insisting the payroll tax bill first be considered.
With just days left to resolve the crisis, both parties are locked in a complex legislative dance as they try to out-maneuver each other for political advantage in a high-stakes battle that will likely carry over into the 2012 presidential and congressional elections.
Democrats are worried that once the spending bill is approved, Republicans will leave town for the holidays, eliminating any pressure on them to compromise on the payroll measure, which would also extend expiring jobless benefits for millions of unemployed Americans.
Republicans have accused Democrats of manufacturing a crisis by refusing to sign off on the government funding bill when they had already broadly agreed to it.
The next steps were not immediately clear, but House Speaker John Boehner, the top U.S. Republican, has signaled that he believes the Senate needs to more than simply reject his chamber's bill.
Boehner wants the Senate to pass its own version of the measure, which would require the consent of at least seven Republicans to clear a procedural roadblock.
Such action, Boehner believes, would make it more likely to find common ground on a final bill, a Republican aide said.
Boehner, speaking at a forum on Wednesday hosted by Politico newspaper, said: "It's time for the United States Senate to act, and they're going to act. Because we can sit here and stare each other in the face for as long as it takes, but they are going to act."
The White House said it was still hopeful that a deal could be agreed to before the deadline.
"There is still time for Congress to do its work ... in time for their scheduled vacation by the end of this week," White House spokesman Jay Carney said aboard Air Force One.
It was "easily doable" to reach an agreement on payroll taxes and to keep the government funded, he added.
Congressional aides say a compromise deal could see Republicans dropping their demand to fast-track approval of the Keystone XL pipeline from Canada to Texas, and Democrats agreeing to scrap their proposal to tax millionaires.
The White House and independent economists have warned that the fragile U.S. economic recovery could take a hit if the payroll tax cut is allowed to expire. Many Republican lawmakers, however, have expressed skepticism about its stimulative impact on the economy.
Leaders of both parties fear a voter backlash in 2012 if the tax relief measure is not renewed. Public confidence in Congress plunged to new lows this year after a series of battles over tax and spending pushed the country to the brink of default and cost it its coveted AAA credit rating by one rating agency.
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