The Senate failed on Saturday to overcome Republican-led opposition to two bills extending the Bush-era tax cuts to taxpayers making less than $250,000 and $1 million a year, prompting leaders to talk Sunday of progress toward a deal extending tax cuts for people at all income levels on a temporary basis, along with unemployment benefits.

“I’m optimistic that we’ll be able to come together,” Senate Minority Leader Mitch McConnell, R-Ken., said on NBC’s “Meet the Press.”

“I think it’s pretty clear now taxes are not going up on anybody in the middle of this recession,” he added.

Last Tuesday, President Obama held a meeting in the White House with leaders from both parties and chambers of Congress on the Bush tax cuts and other issues, including extending emergency unemployment insurance for those whose benefits were cut off last week or are scheduled to be cut off at the end of the year. The release of the Labor Department’s November jobs report on Friday, in which the unemployment rate crept up to 9.8 percent, bolstered the case for extending the benefits (see Unemployment Edges Up to 9.8%).

The remaining question seems to be how long the current tax rates will be extended, whether for one, two, three or more years. The report of the bipartisan deficit commission, which was voted on Friday, showed the need for the government to take steps to rein in the exploding budget deficit, but also recommended cutting tax rates and simplifying the Tax Code (see Deficit Commission Falls Short on Approving Report). The tax cut and unemployment extensions are not likely to be paid for by providing revenue-raising offsets, adding billions more dollars to the projected deficit.

A deal would require President Obama to violate a campaign pledge to stop the extension of the Bush tax cuts for those making over $250,000 a year. Many Democrats are wary of extending the Bush tax cuts for the wealthy and are upset about being forced to do so.

“We’re moving in that direction, and we’re only moving there against my judgment and my own particular view of things,” Senate Majority Whip Dick Durbin, D-Ill., who was a member of the deficit commission, said on CBS’s “Face the Nation” on Sunday.

After the White House meeting last week, Democratic and Republican congressional leaders formed a six-man working group of lawmakers and administration officials tasked with striking a deal on the tax cuts and other pending matters. Their negotiations were temporarily put on hold until the Senate held its vote on extending the middle-class tax cuts, but are expected to resume this week. The House voted last week along mostly party lines to extend the current tax rates for those making less than $250,000 a year, but Senate Republicans signed a letter last week pledging to hold up any pending legislation in the lame-duck session until bills were passed to prevent tax hikes for everybody and provide continued funding for government operations.

The White House appeared to be ready to compromise on the tax cuts extension in order to avoid raising taxes on the middle class and get an agreement to extend unemployment benefits. It is making the case that failing to pass either extension before the end of the year could potentially jeopardize the economic recovery.

"We’ve got to extend the tax cuts for the middle class that are set to expire at the end of the month," said Vice President Joe Biden during the weekly White House address, filling in for President Obama, who paid a weekend visit to the troops in Afghanistan. "If we don’t, millions of middle-class families will see a big bite out of their paychecks starting January 1. And that’s the last thing we should let happen. After a decade in which they lost ground, middle class families can ill-afford a tax hike – and our economy can’t afford the hit it will take if middle class families have less money to spend. And the second thing we’ve got to do is extend unemployment insurance for Americans who have lost their jobs in a tough economy. Without unemployment benefits, families can’t spend on basic necessities that are grown, made, and sold by other Americans."

Republican leaders appear to be ready to agree to extend unemployment benefits in return for a deal on tax cuts. On "Face the Nation," Sen. Jon Kyl, R-Ariz., said, "I think that most folks believe that the recipe would include at least an extension of unemployment benefits for those who are unemployed and an extension of all the tax rates for all Americans for some period of time."

"Obviously, the president won't sign a permanent extension of the current tax rates, so we're going to have some kind of extension," McConnell said on "Meet the Press." "I'd like one as long as possible," He added that he thinks they are going to extend unemployment benefits as well and are woking on that package.

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