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GOP blinks first on tax cut; House, Senate to act on proposal today

House Republicans on Thursday caved to demands by President Obama, congressional Democrats and fellow Republicans for a short-term renewal of payroll tax cuts for all workers. The breakthrough almost certainly spares workers an average $20 a week tax increase Jan. 1.

After days of wrangling that even Speaker John A. Boehner acknowledged "may not have been politically the smartest thing in the world," the Ohio Republican abruptly changed course and dropped demands for immediate holiday season talks with the Senate on a full-year measure that all sides said they want. Senate leaders had insisted on the two-month extension to buy time for talks next year.

The House and Senate plan to act on the two-month extension today.

House Republicans were under fire from their constituents and GOP establishment figures incensed that they would risk losing the tax cut issue to Democrats at the dawn of the 2012 presidential and congressional election year. House GOP arguments about the legislative process and the "uncertainty" a two-month extension would mean for business were unpersuasive.

The 2008 GOP presidential nominee, John McCain, former Bush administration confidant Karl Rove and the Wall Street Journal editorial page were among conservative voices urging House Republicans to retreat.

"In the end House Republicans felt like they were re-enacting the Alamo, with no reinforcements and our friends shooting at us," said Rep. Kevin Brady, R-Texas.

The compromise legislation would renew the tax break through Feb. 29, along with jobless benefits and a "fix" to prevent doctors from absorbing a big cut in Medicare payments. Its $33 billion cost would be covered by an increased fee on mortgages backed by Fannie Mae, and Freddie Mac.

The developments were a clear win for Obama. The payroll tax cut was the centerpiece of his three-month campaign-style drive for jobs legislation that seems to have contributed to an uptick in his poll numbers -- and taken a toll on those of congressional Republicans.

"Because of this agreement, every working American will keep his or her tax cut -- about $1,000 for the average family," Obama said in a statement.

"That's about $40 in every paycheck. And when Congress returns, I urge them to keep working to reach an agreement that will extend this tax cut and unemployment insurance for all of 2012 without drama or delay."

If the cuts had expired as scheduled, 160 million workers would have seen a 2 percentage point increase in their Social Security taxes. And up to 2 million people without jobs for six months would start losing unemployment benefits averaging $300 a week.

The GOP retreat ends a tense standoff in which Boehner's House Republicans came under great pressure to agree to the short-term extension passed by the Senate on Saturday. The speaker was initially open to the idea, but rank-and-file Republicans revolted, and the House instead insisted on immediate talks on the year-long measure passed by the House.

After Senate leaders tried but failed to match the House's goal for a full-year pact, the chamber on Saturday instead gave sweeping approval for the two-month extension of the payroll tax cut, jobless benefits and doctors' Medicare fees that otherwise would have been cut 27 percent. The House had just days before passed a full-year extension that included a series of conservative policy prescriptions unpalatable to Obama and congressional Democrats.

Obama, Republicans and congressional Democrats all said they preferred a one-year extension but the politics of achieving that eluded them. All pledged to start working on that in January.

"Has this place become so dysfunctional that even when we agree to things we can't do it?" Obama asked. "Enough is enough."

The top Senate Republican, Mitch McConnell of Kentucky, was a driving force behind Thursday's agreement, imploring Boehner to accept the deal that McConnell and Senate Democratic Leader Harry Reid had struck last week and passed with overwhelming support in both parties.

Rep. Tom Reed, R-Corning, had been among the strongest opponents of the two-month extension bill, saying it would wreak havoc with businesses, which regularly budget and plan by the quarter.

But late Thursday, Reed said he understood why Boehner agreed to the deal with Reid: after all, the president and Reid refused to budge from their insistence on the two-month deal, meaning the alternative was a tax hike that would be blamed on House Republicans.

"We really had no other choice" than to back Boehner's deal, Reed said.

"We're frustrated that we find ourselves in this position," he said. "Hopefully we'll live to fight another day."

Meanwhile, Rep. Louise M. Slaughter, D-Fairport, was relieved.

"We should have given Americans a tax cut on Monday, when we were all in town and prepared to send this bill to the president. Instead we got dangerous theatrics. It's a shameful way of doing business."

News Washington Bureau Chief Jerry Zremski contributed to this report.