Dems Take Aim at Tax Loopholes in Year-End Fight

Pipeline, tax loopholes take center stage in fight over payroll tax cut, unemployment benefits.

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With worries over a government shutdown firmly out of the way, Democrats and Republicans are entering the final round in their battle over whether, and how, to extend a payroll tax cut and expanded unemployment benefits. While Republicans issue harsh ultimatums to include speeded-up approval of the controversial Keystone pipeline project in the final legislation, Democrats are quietly pushing for the closure of tax loopholes that affect high earners as part of the package.

Likely, the negotiations will last over the weekend and into early next week.

The payroll tax cut and benefits for those unemployed for more than a half-year were both included in the tax deal passed in December of 2010. The tax cut, which saves the average family about $1,000 a year, was originally billed as a temporary measure to boost the economy, but the White House has pushed for it to be extended until the end of 2012.

[Opinion: Obama blinked in payroll tax fight.]

It's a showdown of partisanship and ideology, but the sides aren't that far off on the substance of the issues. Democrats dropped demands to include a tax hike on millionaires as part of the deal but are still hoping to close tax loopholes that often benefit high earners. These include a tax incentive for corporate jets and tax benefits that allow income earners to dodge some payments through shell companies, according to a senior Democratic aide. Elimination of the loopholes, combined with other mandatory spending cuts that the parties agreed to as part of the super committee discussions, could pay for the estimated $150 billion cost of an extension.

Meanwhile, Republicans are drawing a hard line on Keystone XL, a controversial transcontinental pipeline that the administration has delayed a decision on. On Friday afternoon, Senate Minority Leader Mitch McConnell said he'd never sign on to a deal that didn't include language forcing the Obama administration to rule on the project—setting up a showdown with the White House. "Congress can do something not just to assist people who are struggling in a down economy or out of work, but to create jobs at the same time," McConnell said on the Senate floor. The White House has said it wouldn't support such a measure—but, perhaps tellingly, left that out issue out of a veto threat for the House-passed bill.

The House passed a trillion-dollar spending bill Friday afternoon, averting a government shutdown but also raising fears that Republican representatives could leave town and force the Senate to take up their extension bill passed last week, which included many items unacceptable to Democrats.

Twitter: @AlexParkerDC