WASHINGTON (Reuters) - Lawmakers, urged on by President Barack Obama, raced against the clock on Thursday to keep the government funded beyond Friday and extend a worker tax cut and jobless benefits.
Republicans and Democrats appeared to be backing away from a high-stakes game of "chicken" that has brought the U.S. government to the brink of a shutdown for the third time in a year and threatened an effective tax hike on 160 million people in 2012.
Party leaders likely fear a backlash from angry voters who already have lost confidence in Congress's ability to pass even the most basic legislation and will get a chance to render their verdict in the 2012 presidential and congressional elections.-
Negotiators were trying to reach a final deal on a spending bill to fund many government agencies, including the Defense Department, through the fiscal year that ends September 30.
Meanwhile, aides to congressional leaders were trying to craft a compromise bill that would extend a payroll tax cut for another year and long-term unemployment benefits.
Aides to Democrats and Republicans were trying to resolve remaining differences over individual spending items in the funding bill. In separate negotiations they were trying to find agreement on how to cover the $120 billion cost of the payroll tax cut extension and whether some long-term jobless benefits should be scaled back.
A flurry of meetings on Capitol Hill on Thursday afternoon suggested that the brinkmanship had given way to negotiations that could, barring a last-minute breakdown, produce deals to fund the government through September 2012 and extend the payroll tax cut and unemployment benefits.
"Congress should not and cannot go on vacation before they have made sure that working families aren't seeing their taxes go up by $1,000 and those who are out there looking for work don't see their unemployment insurance expire," Obama said.
Shortly after he spoke, top lawmakers from both parties began renegotiating a $915 billion spending bill.
Unless legislation is passed by midnight Friday, many key federal agencies, including the Defense Department, Homeland Security and Environmental Protection Agency, will run out of money.
There were some major differences between Democrats and Republicans over policy initiatives backed by federal funds, such as whether to place new restrictions on U.S. travel to Cuba.
There also was division within Republicans ranks over the spending bill and a push to extend the payroll tax cut.
House Speaker John Boehner, the top Republican in Congress, said he expects the spending bill to win passage. But some veteran Republicans, like Representative Steve King, said they were not so sure, especially with a pricetag that troubles conservatives.
"I think they are short of votes right now," King said. But he predicted leadership would ultimately round them up.
Lawmakers were also negotiating on how to extend the payroll tax cut for workers that is set to expire on December 31.
"By the end of the day we should have a good sense of whether we're on the compromise track or the train wreck track," said a senior Senate Democratic aide of the spending and tax bills.
Democrats want to attach to the payroll tax cut extension a continuation of long-term unemployment benefits that will start phasing out early next year. Republicans want to scale back those benefits.
The payroll tax cut would give 160 million Americans about $1,000 a year in additional spending power. The White House and a number of economists say it would boost the country's fragile economic recovery, although many Republicans question that.
The heightened activity on Capitol Hill on Thursday raised hopes that Congress would avoid the first government shutdown since late 1995 and early 1996.
Earlier in the day, Senate Republican leader Mitch McConnell said he was "confident and optimistic we'll be able to resolve both (bills) on a bipartisan basis."
But House Democratic leader Nancy Pelosi, at a separate press conference, raised the possibility of Congress having to pass a seventh stop-gap spending bill to give more time for negotiators to work out a deal on funding through September 30.
After meeting with Obama on Wednesday, Senate Democrats backed down on their demand for a surtax on income over $1 million to pay for the payroll tax cut. But they will still be able to campaign for re-election telling their core supporters that they fought for months for a tax hike on the wealthy.
On Thursday Senate leaders were negotiating over alternative ways to cover the $120 billion cost of the payroll tax cut extension.
(Additional reporting by Rachelle Younglai, Kim Dixon, Thomas Ferraro, Donna Smith and Caren Bohan; Editing by Ross Colvin and Bill Trott)
Reporting by Richard Cowan