02:41 - Source: CNN
Payroll tax cut extension

Story highlights

Republican Sen. John Thune says a vote could take place Saturday

The plan's chances are uncertain in the Senate and House

Impasse over how to pay for the measure prevents a broader deal

Both parties are holding Senate caucus meetings to go over the two-month proposal

Washington CNN  — 

Senate negotiators were unable to work out a comprehensive deal on extending the payroll tax cut and instead are proposing a two-month extension, two sources said Friday.

The possible deal was being discussed with the caucuses of both parties in separate meetings Friday evening. To move forward, it would have to be approved by the full Senate in a vote that could come as soon as Saturday, and then voted on by the House.

According to a top Senate Republican source and a Democratic source, the two sides were unable to reach an agreement to extend the payroll tax cut and unemployment benefits for a full year.

Instead, they are proposing a plan to extend those programs – and increased Medicare payments to doctors – at current levels for two months.

The impasse involved how to pay for the programs for a full year, the sources said. However, the two-month extension would be fully paid for, according to the sources.

Payroll tax cut: What’s at stake?

In addition, the Republican source said that the GOP side also got Democrats to agree to include a provision to speed up a decision on the Keystone XL pipeline as part of the deal.

It was unclear whether the full Senate would accept the two-month plan. Even less certain was whether the proposal would be supported by either party in the House.

Democrats, led by President Barack Obama, made extending the payroll tax cut a major priority, and a two-month agreement could be a disappointment. Conservative House Republicans, meanwhile, oppose such short-term steps in their push for substantive spending reforms.

“We have not signed off on anything, and we will not until we talk to our members,” a House Republican leadership aide said.

Republican Sen. John Thune of South Dakota confirmed the details of the proposal in an interview on CNN’s “Erin Burnett OutFront” and said, “It’s not a perfect solution by any stretch, but it’s what we were able to get through.”

A Senate vote would take place Saturday “if everything moves forward according to plan,” Thune told Burnett.

The scaled-back proposal followed a day of negotiations as legislators tried to wrap up their work on what was scheduled to be the final day before breaking for their holiday recess.

Senate Majority Leader Harry Reid, D-Nevada, said Democrats supported the two-month deal because “that was the best we could get” and it was important to preserve the payroll tax break, even temporarily.

Failure to pass the payroll tax measure, a major part of Obama’s job-creation plan, would cost working Americans an average of $1,000 in higher taxes next year.

The White House issued a statement after news of the two-month proposal broke Friday, lauding the agreement despite the inclusion of the pipeline provision – something the president has said he would reject.

“This is an important step towards enacting a key provision of the president’s American Jobs Act and a significant victory for the American people and the economy, because as independent analysts have said, failing to extend this tax cut would have had a damaging effect on our recovery and job growth,” said the statement issued by White House spokesman Dan Pfeiffer. “The president urges Congress now to finish up their business for the American people.”

A senior administration noted that though the president has said he would reject any attempt to “mandate” construction of the pipeline before it receives further review, the Keystone provision Senate leaders have agreed to speeds up the approval process – giving the administration 60 days to make a decision – but does not mandate construction.

When asked about the apparent contradiction by the president over the pipeline provision, another senior administration official said the president’s top priority is making sure taxes don’t go up January 1.

In the Senate, the payroll tax measure has faced an impasse over specific provisions sought by each party.

Senate Democrats proposed a new tax on income of more than $1 million to help pay for the lower payroll tax rate for another year, but Republicans have blocked the plan from proceeding on two occasions.

Meanwhile, House Republicans pushed through their own version of a payroll tax measure this week that included a provision to speed government approval of the Keystone pipeline.

The Obama administration has delayed until 2013 a decision on the pipeline that would transport oil from Canada’s tar sands production facilities in northern Alberta to refineries on the Gulf Coast of Texas.

The delay followed complaints by environmentalists and Nebraska officials that the pipeline route could threaten that state’s Sandhills region and vital Ogallala aquifer. Alternate routes are being considered, and Nebraska officials as well as the pipeline company, TransCanada, acknowledge that the process of approving a final route will last into the second half of 2012.

Republicans, who traditionally back the oil industry, accuse Obama of delaying the issue until after his re-election bid next year for political reasons. Labor unions that usually support Democrats back the pipeline project, while environmentalists also allied with the political left oppose it.

The House plan that includes the oil pipeline provision never came up for a vote in the Senate, leading to the negotiations in what were scheduled to be the final days of congressional action this year.

Democrats wanted the lower payroll tax rate and other provisions extended through 2012, but were weighing the idea of a fallback two-month extension to ensure that there will be no negative impact on Americans if Congress fails to reach a broader deal this week.

A Senate Democratic leadership aide said the two-month extension would set up further negotiations on a larger deal.

However, House Speaker John Boehner, R-Ohio, said Friday that any attempt for a short-term extension of the payroll tax cut and unemployment benefits would be altered in the House.

Senate Minority Leader Mitch McConnell, R-Kentucky, also said he would need the provision to speed up a decision on the pipeline in order to support a payroll tax-cut extension. The two-month plan proposed by Senate negotiators Friday night included the oil pipeline provision in what Sen. Chuck Schumer, D-New York, called a “meaningless concession” since Obama ultimately retains the ability to reject the project.

The State Department, which has final authority to approve the oil pipeline, has warned that a shortened deadline for approving the project would leave insufficient time to assess the route alteration.

The legislative maneuvering was a last-gasp bid to end weeks of political wrangling that threatened a partial government shutdown and raised public frustration with Congress even further.

A poll released Thursday by the Pew Research Center for the People and the Press showed public discontent with Congress at record levels, with two-thirds of voters saying most lawmakers should be voted out of office next year.

CNN’s Deirdre Walsh contributed to this report.