WASHINGTON, Dec 22 (Reuters) - The top Senate Republican on Thursday sought to break a year-end stalemate with Democrats over extending a payroll tax cut for 160 million Americans, an issue that has split his party and raised the risk of a U.S. economic downturn in 2012.
Mitch McConnell urged fellow Republicans in the House of Representatives to temporarily extend the tax break to allow time for negotiations with Democrats on a longer-term fix. Simultaneously, he called on Democratic Senate Majority Leader Harry Reid to appoint negotiators to work on a full-year deal.
McConnell's proposal was the strongest sign yet that the stand-off between Democrats and House Republicans could be resolved since House Speaker John Boehner, under pressure from a rebellious caucus, scuppered a Senate deal for a two-month extension last weekend.
"House Republicans sensibly want greater certainty about the duration of these provisions, while Senate Democrats want more time to negotiate the terms," McConnell said. "These goals are not mutually exclusive. We can and should do both."
For months many Republicans were cool to extending the payroll tax cut at all, saying it was not an effective economic stimulant. But in recent weeks they have reluctantly embraced it as Democrats relentlessly hammered away at the issue and economists warned failure to extend it by December 31 could deal a major blow to a fragile economic recovery.
There was little daylight between McConnell's proposal and the Democratic and White House position on the issue: pass the temporary extension now and negotiate a full-year deal later.
Seeking to increase pressure on House Republicans, an impatient-sounding President Barack Obama said at the White House, "Enough is enough."
"Has this place become so dysfunctional that even when people agree to things, we can't do it?" he asked, surrounded by
Americans who had responded to a White House call for stories on what a lapse in the tax cut would mean for their families.
THROWING A LIFELINE
McConnell's proposal was seen throwing a lifeline to House Republicans who have come under intense criticism from Republican senators and leading conservatives for blocking the bipartisan Senate bill, which would avert an effective $1,000-a-year tax increase on the average worker starting on January 1.
A senior House Republican aide predicted a bipartisan deal, but said it would not be reached until next week.
"Congress always goes up to the deadline," the aide said, noting earlier down-to-the-wire battles this year to raise the U.S. debt limit and avert government shutdowns.
But Representative Tom Price, who heads the Republican Policy Committee made up of House conservatives, said he opposed McConnell's proposal.
In their second phone call in two days, Boehner called Obama and told him there was no reason why a year-long deal could not be reached before year's end. Boehner says a short-term extension creates uncertainty for businesses.
The White House said Obama had told Boehner he was committed to begin working immediately on a full-year deal once the House passed the Senate bill.
Both sides are deadlocked over how to pay for a full-year deal on extending the payroll tax cut, long-term unemployment benefits and payments to doctors treating patients under the Medicare healthcare system for the elderly.
To cover a portion of the nearly $200 billion price tag, Democrats initially sought a surtax on the wealthiest Americans while Republicans wanted to pay for it through spending cuts.
Once Democrats abandoned the tax increase proposal, a range of ideas were discussed, including cutting federal worker pensions, raising some fees related to government-backed mortgages and closing some tax loopholes on the rich.
In urging House Republicans to back a short-term measure, McConnell noted a provision in the Senate bill that seeks to speed up a decision by Obama on TransCanada's proposed Keystone XL pipeline between Canada and Texas refineries.
McConnell said the project would create thousands of jobs. The White House, however, says any attempt to speed up the process could result in a permit being denied for the project.
The Keystone provision was not enough to prevent House Republicans from revolting against the Senate deal last weekend.
If Boehner tries to sell McConnell's plan to his caucus he may struggle to persuade fiscally conservative Tea Party Republicans who have proved uncompromising during a series of battles with Democrats this year over taxes and spending.
But there were some signs that Republicans were starting to waver.
Republican Representative Sean Duffy, who was elected in 2010 on a wave of voter anger over government spending and a bad economy, voted with the majority of his colleagues on Tuesday in rejecting the Senate bill.
By Thursday he had had a change of heart. "The Senate's refusal to work with the House to hammer out the differences in our bills before Christmas has left us with few other options," he said.
(Writing by Ross Colvin, additional reporting by Thomas Ferraro, Donna Smith, Kim Dixon, Laura MacInnis and Alister Bull; Editing by Vicki Allen)
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