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U.S. Congress approves two-month extension of payroll

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U.S. Congress approved a two-month payroll tax cut extension on Friday, capping an exhausting year of partisan warfare over taxes and spending that will resume in January, with the economy barely scratching out a recovery and elections on the horizon.

The Senate and the House of Representatives, by swift voice votes in chambers nearly emptied for the holidays, passed a $33 billion US measure to keep the payroll tax rate at 4.2 percent through February. It had been slated to increase on January 1 to 6.2 percent.

The temporary fix lets lawmakers lower the curtain, for now, on weeks of partisan deadlock that in the end produced only another inconclusive truce in a fiscal policy debate set to rage straight through the 2012 election season and beyond.

Minutes after the bipartisan deal was passed by Congress, the bickering that has come to dominate Capitol Hill resumed.

Republican Representative Tom Price, a leader of House conservatives, immediately criticized the short-term extension, calling it a "two-month punt" and saying it would not have been needed if Senate Majority Leader Harry Reid, a Democrat, and President Barack Obama had "been willing to do their job today."

Democratic and Republican leaders are expected to begin negotiating a full-year deal in January. Both parties remain deeply divided over how to pay for it

In a sign that the battle is far from over, Reid signaled that Democrats could renew their push for a surtax on wealthier Americans to cover the cost of the extension. Democrats had dropped that demand during the year-end negotiations that produced the two-month deal.

"There is nothing off the table," he said when asked about the tax on millionaires. "There should be a fair tax on rich people," he added.

Republicans overwhelmingly oppose raising tax rates for anyone, including the wealthy, and want to pay for the extension with deeper spending cuts.

The temporary payroll tax cut extension gave Obama and the Democrats a political win over House Republicans. They had dug in their heels against the short-term deal on the insistence of Tea Party-aligned fiscally conservative members, but in the end they had to back down.

Any edge conferred on Democrats by the victory might be short-lived, with the 2012 election cycle set to kick off with the Iowa Republican presidential caucus on January 3. There is a long road ahead until voters go to polls in November.

The $33 billion needed to pay for the two-month extension will be raised by increasing fees charged by housing finance giants Fannie Mae and Freddie Mac for guaranteeing mortgages.

Analysts said the fee hike, which investors will likely pass along to borrowers, could raise financing costs for mortgages, but probably not enough to slow a housing market recovery.

Unemployment benefits that had been set to expire soon were extended as well, while cuts in payments to doctors who treat patients in the government-backed Medicare health insurance program for the elderly were postponed, under the measures.

Also included was a Republican initiative aiming to force the Obama administration into fast approval of an oil pipeline opposed by environmentalists and many Democrats.

The provision gives Obama 60 days to either approve TransCanada's (TRP-T) Keystone XL pipeline running from Canada to Gulf of Mexico facilities in Texas, or declare it not in the national interest.

Obama wants more time to evaluate the environmental impact of routing the pipeline through sensitive areas of Nebraska. The White House has said that if pushed to make a decision within 60 days, the administration would be forced to reject the project.

An increase in the payroll tax would have hit the wallets of 160 million U.S. workers at a time of high unemployment and deep voter dissatisfaction with the tax system, the shape of the economy and the way Congress conducts itself.

Analysts had warned that not renewing the tax cut could jeopardize the recovery, perhaps even risking another recession. But the modest two-month fix drew fire from some businesses for complicating their payroll processing and tax planning, while critics said it was bad tax policy that causes uncertainty.

The two-month deal came after lawmakers were unable to agree on ways to offset the costs of a full-year payroll tax cut extension. The temporary extension legislation was expected to be sent to Obama to sign into law before December 31.

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