Leaders meet over spending, tax-cut impasse as clock ticks

In the first sign of progress in days of stalemate over the payroll tax extension and a government funding bill, House Speaker John Boehner, Senate Majority Leader Harry Reid and Senate Minority Leader Mitch McConnell met privately for about an hour in the Capitol Wednesday night.

There was no immediate sign that a deal was near, but the meeting could be an indication they finally are working directly with each other toward resolving the dispute that threatens to shutter the government at the end of the week and raise the payroll tax rate on working Americans at the end of the month.

The development came amid news that Senate Democrats will offer a new proposal for extending the payroll tax cut that drops a provision to tax income over $1 million, a Democratic source told CNN.

The so-called “millionaires tax” was opposed by Republicans, who had blocked previous proposals by Senate Democrats to prevent the payroll tax on workers from returning to a higher rate at the end of the year.

No further details were immediately available on the new proposal, first reported by CNN, which emerged from a White House meeting between Senate Democratic leaders and President Barack Obama on Wednesday afternoon, the source said.

2011 a big year for flirting with government shutdowns

Obama for months has argued that the wealthy should pay what he terms their fair share of taxes.

A senior administration official told CNN the White House would not have any specific reaction to reports that Obama and Senate Democratic leaders were abandoning the surtax on millionaires as part of negotiations.

But the official, who was not authorized to speak on the record, said, “We threw our support behind the Senate proposal on the millionaire surtax. It fell in line with the President’s principles and priorities. So, we’ve always been open to other pay-fors – but as the President has said himself a couple of times in the last 10 days – he won’t accept a pay-for that’s unbalanced and he won’t allow extraneous political issues to get in the way.”

White House communications director Dan Pfeiffer said Obama has concerns about provisions reported in the Republican-supported spending bill, which would keep the government operating after Friday. “This includes provisions that would undermine Wall Street reforms, enact extreme social and ideological riders, undercut environmental protections, and threaten the foreign policy prerogatives of the president.

“Given the magnitude of the legislation – providing over $1 trillion dollars in funding – coupled with the unresolved payroll tax cut and unemployment insurance extension, Congress should pass a short-term continuing resolution as it has seven times already this year so that all parties have an appropriate opportunity to consider and complete all of the critical budget and economic issues …” Pfeiffer wrote.

Earlier, political skullduggery spilled onto the Senate floor with Democratic and Republican leaders openly squabbling over the order of votes on the GOP payroll tax-cut plan and the spending measure needed to keep the government funded.

The inability of Senate party leaders to agree on how to proceed, let alone actually schedule votes, stymied progress on measures that both parties have said they support in concept – holding down taxes for working Americans and determining government spending for the rest of the fiscal year.

Washington’s holiday gift: More gridlock

In a rare display of overt hostility, Reid, D-Nevada, accused Republican counterpart McConnell of “living in a world of nonreality” and said the GOP payroll tax cut plan passed Tuesday by the House was “dead on arrival” in the Senate.

McConnell, R-Kentucky, shot back that Democrats wasted weeks of time with political “show votes” intended to bolster President Barack Obama’s re-election campaign.

The Senate, he said, should now vote first on a broad spending agreement reached by congressional negotiators to ensure that government funding continues after a previous short-term extension expires at midnight Friday.

“Quit wasting our time here in the Senate scoring points with the shutdown two days away,” McConnell said.

Reid and other Senate Democrats responded that McConnell and Republicans want to avoid certain defeat on their payroll tax plan, which includes controversial provisions to speed approval of the Keystone XL oil pipeline from Canada and weaken environmental regulations.

House GOP leaders are considering a move that would try to force a vote on the huge government spending bill, according to two Republican members.

In a closed-door House Republican conference meeting Wednesday, Boehner floated the option of not waiting for Democrats to sign off on a final agreement between the House and Senate on the measure.

Instead, House GOP leaders are discussing combining the spending bills for various government agencies into a single package and having a House vote on Friday. They would then send it to the Senate and attempt to force Democrats to vote on it – or be held responsible for a potential government shutdown.

Rep. Tom Rooney, R-Florida, said leaders have not decided on that course, but are still determining whether they could get 218 Republican votes to pass it – assuming they are unlikely to get much Democratic support.

Another Florida Republican, Allen West, said he supported the idea of the House moving ahead with its own spending bill package so federal agencies would be funded. “We can’t wait,” West told CNN.

After the meeting, Boehner insisted that Republican and Democratic negotiators worked out a deal on the government funding bill, but that Senate Democrats are holding action on that measure hostage to negotiations on the payroll tax cut bill.

“It’s pretty clear to all of us that President Obama and Senator Reid want to threaten a government shutdown so they can get leverage on a jobs bill because the United States Senate can’t pass one,” Boehner said.

Health and Human Services Secretary Kathleen Sebelius sent a letter Wednesday night to employees, citing possible effects of a shutdown.

If funding lapses, she wrote, some employees would be furloughed. The letter was obtained by CNN.

Balanced-budget proposals fail

In a sign of the confusing politics at play, McConnell blocked Reid’s attempt to bring the House payroll tax proposal to a vote. Reid sought to demonstrate that the Republican plan would fail, and Democrats accused McConnell and his GOP colleagues of trying to avoid the embarrassment of that outcome.

The issue comes down to mistrust between the parties. Democrats fear that approving the spending deal first will allow Republicans to leave Washington for the upcoming holiday recess without compromising on the payroll tax-cut extension worth $1,000 to the average working family.

Reid called instead for Congress to pass another short-term spending extension to keep the government funded until December 21, giving legislators more time to reach a deal on the payroll tax measure and the long-term spending proposal.

McConnell said that isn’t necessary, because negotiators on a House-Senate conference committee already reached agreement on the legislation. The problem, he said, is that Obama and Reid told Democratic negotiators not to sign the deal in order to hold up a final vote in a dispute over the separate payroll tax measure.

The House passed its version of the payroll tax plan Tuesday on a 234-193 vote, largely along party lines.

However, the White House has said Obama will veto the plan if it reaches his desk, setting up further brinksmanship with Congress scheduled to leave Washington for its holiday recess at the end of the week.

The Keystone XL pipeline, which is currently in limbo as the State Department considers objections from environmentalists, would bring oil from Canada’s oil sands in northern Alberta to Texas.

Pipeline presents dilemma for Obama

The State Department recently said its decision on the Keystone XL pipeline would be delayed until 2013 to allow examination of environmental issues raised by critics, a move Republicans labeled as political, to put off the issue until after next year’s presidential election.

House Majority Leader Eric Cantor, R-Virginia, said Tuesday that the payroll tax cut measure does exactly what Obama has been calling for by providing tax protection for working class Americans while creating new jobs through the pipeline project.

Reid and other Democrats argue the pipeline project requires more study and should not be fast-tracked as part of a political calculation by Republicans.

CNN’s Xuan Thai, Dan Lothian and Deirdre Walsh contributed to this report.