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WASHINGTON (Reuters) - Angry Democrats in the House of Representatives defied President Barack Obama on Thursday and rejected a deal he struck with Republicans to extend low tax rates that are set to expire in three weeks.
While unlikely on its own to derail the tax plan, the Democrats' rebellion gives Obama another political headache just over a month after he took a beating in mid-term elections.
In a raucous, closed-door meeting on Capitol Hill, mutinous Democrats chanted "Just say no!" as they vowed to overhaul Obama's plan to extend low tax rates for nearly all Americans, according to lawmakers in the room.
Several at the party meeting said they were angered by the White House's "take it or leave it" attitude about the deal, which includes tax breaks for the wealthy that many Democrats oppose.
Obama's plan would keep lower rates in place for another two years, reduce the estate tax, and extend tax breaks and other benefits aimed at lower-income Americans.
Democrats have argued that the revenue that would be lost by extending tax breaks for the wealthiest 2 percent of U.S. households can be put to better use at a time when unemployment is close to 10 percent.
There was still strong support in Congress for the broader deal and time for lawmakers to negotiate a compromise in the coming days. Tax bills will rise in January by an average of $3,000 per household if Congress does not act.
Senate Democratic leader Harry Reid was to unveil tax-cut legislation later in the day, with a vote possible Saturday.
But Obama's plan would not come up for a vote in the House under a resolution approved by Democrats in that chamber.
The administration is confident that the "major components" of the deal will survive the congressional maneuvering, White House spokeswoman Amy Brundage said.
After Democrats suffered substantial losses in the November midterm elections, Obama must now quell an insurrection from the liberal wing of his own party.
He grudgingly accepted a rare compromise on taxes with the Republicans, who will soon wield greater clout in Washington.
Economists say the deal could boost the sluggish economy at a time when Congress has no appetite for spending-based stimulus efforts.
The plan will cost between mid-$700 billion to upper-$800 billion, the White House said, deepening budget deficits that are already at their highest levels relative to the economy since World War Two.
Bond markets slumped this week on fears that the tax cuts would put too heavy a burden on the budget, but U.S. Treasuries prices rose on Thursday as investors reckoned the selloff was overdone.
A measure that would allow the tax breaks to expire for the wealthiest households passed the House last week, but failed in the Senate.
Though it is unlikely a similar measure would pass the Senate on a second try, House Democrats could try to toughen the estate tax, an element of Obama's package that House Speaker Nancy Pelosi called "a giveaway" after the meeting.
"The estate tax ... is a bridge too far for many of our members," Pelosi said.
The estate tax, which lapsed at the beginning of this year, is due to kick in again in January at a rate of 55 percent for estates worth more than $1 million. Obama's plan would lower that rate to 35 percent for estates worth over $5 million.
Democrats only have a few more weeks to wield power in the House before they hand control to Republicans, who won big in the November congressional elections on a promise to slash government spending.
Many House Democrats blame Obama for the loss, feeling he failed to adequately defend them and go after Republicans. Their decision to reject the deal came a day after Vice President Joe Biden met with them in an unsuccessful effort to drum up support.
"He said 'take it or leave it,' and we said leave it," Representative Lloyd Doggett said.
Many Democrats say the tax deal could set a bad precedent for the coming two years by showing Republicans that he is quick to compromise.
"It's only going to get worse for the president if he allows himself to be pushed around like this," Democratic Representative Anthony Weiner said on ABC television.