WASHINGTON In a surprise about-face, Republican leaders in the House of Representatives dropped their demand on Monday for spending cuts to offset the costs of extending a soon-to-expire payroll tax cut for 160 million workers.
The Republican offer represented a potential breakthrough in deadlocked negotiations with Democrats but it could draw fire from budget-slashing conservatives within the party who are staunchly opposed to adding to a trillion-plus deficit.
Notably, the offer was issued by both House Speaker John Boehner, the top Republican in Congress, and his deputy Eric Cantor, who has often taken a more hardline approach in budget negotiations with Democrats over the past year.
The White House reacted cautiously to news of the offer, first reported by Reuters, calling it "hypothetical."
Talks on extending the payroll tax, which is due to expire on February 29, have been stalled over how to pay for it, with both sides refusing to make significant compromises and accusing each other of bad faith negotiations.
Republicans control the House and Democrats control the Senate.
Boehner and Cantor blamed Democrats for blocking agreement on spending cuts to cover the roughly $170 billion price tag of extending the payroll tax cut and unemployment insurance for a full year, along with keeping doctor payments under the Medicare health insurance program for the elderly at current rates.
"(This) has made it necessary for us to prepare this fallback option to protect small business job creators and ensure taxes don't go up on middle class workers," they said in a joint statement.
Extending the tax cut through 2012 would give the average U.S. family about $1,000 more in spending power. That in turn would inject more than $100 billion into the U.S. economy at a time when it is showing signs of strengthening.
A senior Democratic congressional aide familiar with the negotiations said Republicans first made the compromise offer over the weekend. The decision by Republicans to back away from their demand for spending cuts was seen as a major concession, the aide said.
Republicans made deficit reduction a rallying cry during last year's budget battles with Democrats that brought the U.S. government to the edge of a shutdown three times and cost the country its coveted AAA credit rating from the Standard & Poor's rating agency.
A Republican congressional aide said the party had been discussing the compromise proposal for a week. After weekend talks between Senator Max Baucus, the top Democratic negotiator, and Representative Dave Camp, the top Republican negotiator, Camp held a conference call with Republican leaders to update them on the state of negotiations.
A decision was made on Monday to make the offer, the Republican aide said.
Negotiations will continue on averting a pay cut for doctors treating Medicare patients and on an extension of jobless benefits for the long-term unemployed, while also seeking a way to pay for the package, the Republican leaders' statement said.
The big question is whether House Republican rank-and-file, especially those aligned with the conservative Tea Party movement, will back an extension of the payroll tax cut extension if the costs are not fully covered with either spending cuts or revenue increases.
The issue has divided Republicans in Congress for months. Many House Republicans initially balked at the tax cut, arguing that it was not an effective way to stimulate the economy.
But with public opinion strongly on the side of Democrats, Republicans had embraced the tax cut by 2011. They continued to push for it to be paid for, however, so as to not further add to the national debt.
Now, if Republican leaders are stepping back from their demand, Democrats will likely trumpet it as a victory.
A senior Senate Republican aide predicted that the House Republican leadership plan would win support in the Senate.
"We have said that tax cuts tend to pay for themselves and we should not be overly concerned with paying for them. They (House Republican leaders) came to the same conclusion as we (Senate Republicans) did last December: it's not smart being seen as being opposed to a tax cut or demanding that they be paid for," the aide said.
(Additional reporting by Thomas Ferraro; editing by Ross Colvin and Will Dunham)