Tax fight gets nastier as government shutdown looms

WASHINGTON (Reuters) - The United States on Wednesday faced the prospect of an imminent government shutdown for the third time this year as a fight between lawmakers in Congress over taxes and spending turned nastier.

With time running out for a deal, President Barack Obama metSenate Majority Leader Harry Reid and fellow top Democrats at theWhite House to discuss the looming deadline, aides said.

Democrats, led by Obama, are refusing to sign off on a bipartisan $1 trillion government funding bill that would keep federal agencies operating beyond Friday. They first want Republicans to agree to a compromise deal to extend a payroll tax cut for 160 million Americans.

The Republican-led House of Representatives passed its version of the payroll tax cut bill, which has no surtax on the wealthy, in a vote mostly along party lines on Tuesday, and Reid promptly vowed to kill it in the Democratic-led Senate.

But Senate Republican leader Mitch McConnell blocked Reid's efforts to stage a swift vote on it on Wednesday, saying he wanted to turn first to the government funding bill.

With just days left to resolve the crisis, both parties are locked in a complex legislative dance as they try to out-maneuver each other for political advantage in a high-stakes battle that will likely carry over into the 2012 presidential and congressional elections.

The test of wills has even spilled over onto the Internet. Both the White House and Speaker John Boehner, the top Republican in Congress, have set up rival countdown clocks on their websites showing the days, hours, minutes and seconds before the tax cut expires on December 31.

The political jockeying is the latest example of the gridlock in Washington that has driven public confidence in Congress to record lows this year.

"That is the kind of stuff that is driving the American people bat crazy right now and we have to stop it," Democratic Senator Claire McCaskill, told reporters.

A senior Republican aide said he still believed a grand compromise would be reached.

"Neither side wants to be blamed for shutting down the government or raising taxes just before Christmas," the aide said.

FLEEING TOWN

Democrats are worried that once the spending bill is approved, Republicans will leave town for the holidays, eliminating any pressure on them to compromise on the payroll measure, which would also extend expiring jobless benefits for millions of unemployed Americans.

Republicans have accused Democrats of manufacturing a crisis by refusing to sign off on the government funding bill when they had already broadly agreed to it.

The next legislative steps were not immediately clear on Wednesday, but Boehner has signaled that he believes the Senate needs to do more than simply reject his chamber's bill.

Boehner wants the Senate to pass its own version of the measure. Such action would make it more likely to find common ground on a final bill, a Republican aide said.

Boehner, speaking at a forum hosted by Politico newspaper, said: "It's time for the United States Senate to act, and they're going to act. Because we can sit here and stare each other in the face for as long as it takes, but they are going to act."

The White House said it was still hopeful that a deal could be agreed to before the December 31 deadline.

"There is still time for Congress to do its work ... in time for their scheduled vacation by the end of this week," White House spokesman Jay Carney said aboard Air Force One.

Leaders of both parties fear a voter backlash in 2012 if the tax relief measure is not renewed.

Americans are deeply frustrated with Congress after witnessing a series of battles over tax and spending that pushed the country to the brink of default and cost it its coveted AAA credit rating by one rating agency in August.

Congressional aides say a compromise deal could see Republicans dropping their demand to fast-track approval of the Keystone XL pipeline from Canada to Texas, and Democrats agreeing to scrap their proposal to tax millionaires.

The Republican bill passed by the House relies mainly on freezing federal workers' pay and cutting pensions for savings, rather than taxing the wealthy. It also seeks to encourage swift approval of the Keystone XL pipeline and eases some environmental rules.