In a turnabout from several days of vocal confrontation, the Senate's top Democrat and Republican are both expressing optimism that they are nearing an end to disputes over renewing a payroll tax cut and extra benefits for the long term unemployed and avoiding a federal shutdown.
Majority Leader Harry Reid opened Thursday's session of the Senate by saying he has been in talks with Senate Minority Leader Mitch McConnell. The Nevada Democrat said he and McConnell hope to reach an agreement to end this contentious session of Congress in the next few days.
McConnell, a Kentucky Republican, said he was confident they could resolve their remaining disputes.
THIS IS A BREAKING NEWS UPDATE. Check back soon for further information. AP's earlier story is below.
Democrats are abandoning their demand for a surtax on millionaires to help finance payroll tax cuts in a sign that lawmakers are trying to broker a compromise on Congress' highest-profile year-end dispute.
Even so, there is no clear path to quick bipartisan agreement on the legislation, which would prevent an automatic Social Security tax increase on 160 million workers and the expiration of jobless benefits for people out of work the longest. Both would occur Jan. 1 without congressional action.
Lawmakers are also embroiled in a squabble over a huge, separate spending bill, a dispute that would force a shutdown of most of the government on Saturday unless it is resolved. Neither party wants to risk the wrath of voters by shuttering government doors.
Republicans say they plan to try winning House approval for a $1 trillion measure financing dozens of agencies through next September.
But that means a conflict with the White House, whose communications director, Dan Pfeiffer, said President Barack Obama had problems with some social, environmental and other provisions in the legislation. Pfeiffer said Congress should approve a short-term bill to keep the government open while final disputes are resolved.
House Republicans officially unveiled the massive, bipartisan spending bill late Wednesday to fulfill transparency rules, but Senate Democrats had yet to officially sign on. However, the measure wasn't expected to change much, if at all, before a vote Friday, despite White House protests and an explicit veto threat regarding provisions placing limits on the ability of Cuban immigrants to visit families on the island or send money back to them.
The pre-Christmas wrangling caps a contentious year in a capital hindered by divided government, with Democrats controlling the White House and Senate while Republicans run the House. Lawmakers have engaged in down-to-the-wire drama even when performing the most mundane acts of governing, such as keeping agencies functioning and extending federal borrowing authority, tasks that are only becoming more politically delicate as the calendar nears the 2012 election year.
That finger-pointing was reflected Wednesday in some of the back and forth between party leaders.
"My friend is living in a world of non-reality," Senate Majority Leader Harry Reid, D-Nev., said of Senate Minority Leader Mitch McConnell, R-Ky., who had suggested that Congress quickly complete its spending work. Reid said unresolved disputes made that impossible.
"The House has done its work. It's time for the Senate to do theirs," said House Speaker John Boehner, R-Ohio, referring to House approval this week of payroll tax legislation.
That bill drew solid opposition from Democrats and Obama in part because it would force work on the Keystone XL oil pipeline from western Canada to Texas Gulf Coast refineries, which Obama would rather delay. They are also unhappy that the bill is financed by cuts to civilian federal workers, Obama's health care overhaul bill and other programs that Democrats say would avoid meaningful contributions from the rich.
Senate aides said top Democrats are writing a new version of the payroll tax legislation that would exclude a 1.9 percent surtax on people earning more than $1 million a year, a levy Democrats relied on to pay for their previous payroll tax cut bills. Instead, they said, their new legislation's savings would include higher fees that government-run Fannie Mae and Freddie Mac would charge to back mortgages and revenue from selling portions of the broadcast spectrum.
Republicans minimized the importance of the Democratic retreat on taxing high-income people.
"I don't think it's much of a concession," said Boehner spokesman Michael Steel. "It never had any chance of passing the Senate, let alone the House."
In one instance of cooperation, the Senate was expected to give final congressional approval Thursday to a $662 billion defense bill that would allow the administration to prosecute terrorism suspects in the civilian justice system.
The White House had initially issued a veto threat against the bill over language requiring the military to handle some terrorism suspects. An agreement was reached by including a provision ensuring that the role of domestic law enforcement agencies would be unchanged.
The bill, which the House approved Wednesday by 283-136, lays the groundwork for weapons purchases, U.S. military activity overseas and the Energy Department's national security programs. Reflecting a period of tight budgets and diminishing U.S. involvement in Iraq and Afghanistan, the legislation envisions $27 billion less spending than Obama proposed -- money that will be supplied in separate legislation.
Also Wednesday, the Senate rejected rival Republican and Democratic proposals to amend the Constitution to require a balanced federal budget.
On the dispute over the giant spending bill, GOP aides have said that as a backup plan, they might push a short-term bill through the House financing agencies into January if they can't win enough support for the $1 trillion package.
Passage of the spending bill, by removing the threat of a federal shutdown, would take pressure off House Republicans to continue bargaining on the separate payroll tax legislation.
However, spotlighting the degree of disagreement between the two parties, they are even at odds over whether the $1 trillion measure is a bipartisan compromise or not.
Republicans and at least one Democrat said agreement had been reached earlier in the week. But the White House and Reid said disagreements remain, with Reid citing provisions relating to travel to Cuba and funding for the Commodities Future Trading Commission.
The spending bill would finance the Pentagon and nine other Cabinet-level departments, as well as scores of smaller agencies. It would trim the budgets of the Environmental Protection Agency, foreign aid and Congress itself while providing funds to combat AIDS in Africa, patrol the U.S.-Mexico border, operate national parks and boost veterans' health care.