Senate Democrats may be forced to set aside tax extenders and unemployment benefits legislation after they were unable to overcome a Republican-led filibuster for the third time.

Senate Majority Leader Harry Reid, D-Nev., reacted with frustration to the defeat on Thursday. "At a time when people are struggling to find work and keep their homes, it is difficult to comprehend why anyone would vote against helping them," he said. "This is a good bill that helps people who need it while strengthening our economy. By voting no on this bill, Senate Republicans said no to — among other provisions — closing loopholes that send American jobs overseas, a $250 tax credit for teachers who pay for supplies out of their own pockets and an extension of unemployment insurance through November.”

Republicans said they voted against the bill because it was not fully offset and would add $33 billion to the deficit. “The Majority Leader wants to make this debate about Republicans opposing something,” said Senate Minority Leader Mitch McConnell, R-Ken. “The only thing Republicans have opposed in this debate are job-killing taxes and adding to the national debt. We’ve offered ways of paying for these programs, and we’ve been eager to approve them. What we’re not willing to do is use worthwhile programs as an excuse to burden our children and our grandchildren with an even bigger national debt than we’ve already got. So the biggest reason the cloture vote we just had failed is because Democrats simply refuse to pass a bill that doesn’t add to the debt. That’s the principle they’re really fighting for in this debate.”

Democrats had trimmed the bill in recent weeks to reduce the cost from $200 billion to under $110 billion, in part by trimming aid to state Medicaid and food stamp programs. They insisted that only the unemployment benefits extension was not fully paid for (see Senate Further Trims Tax Extenders Bill). However, they were unable to get a single Republican vote, and Sen. Ben Nelson, D-Neb., also voted against the bill.

Reid said he would next focus on passing small business jobs legislation. The full Senate will also take up the financial regulatory reform bill, which a House-Senate conference committee finalized on Friday morning (see Conference Committee Finalizes Financial Reform).

However, Senate Democrats hope their Republican colleagues will come under pressure from their unemployed constituents. Approximately 900,000 people have phased out of the federal extended unemployment benefits program as of this week, and another 200,000 will lose their benefits each week until an extension is approved.

Approximately 50 provisions were in the mammoth bill for extending expired or soon-to-expire tax breaks for individuals and businesses, including the research credit, the ability to deduct state and local sales taxes, the above-the-line deduction for qualified tuition and related expenses, tax-free distributions from individual retirement plans for charitable purposes, and an extension on the closing date for home purchases under the First-Time Homebuyer Credit program.

Under the bill, known as the American Jobs and Closing Tax Loopholes Act of 2010, the tax cuts would be offset in part by raising the proportion of income of hedge fund managers, private equity firm partners, venture capitalists and real estate investment partnerships that would be subject to taxes at ordinary income rates as opposed to lower capital gains rates. Other revenue-raising provisions would close some tax loopholes enjoyed by multinational companies that use foreign tax credits to shift their income abroad, and force partners in professional services firms structured as S corporations to pay Social Security and Medicare taxes on a greater share of their earnings.

However, Senate Democrats have modified several of the tax-raising provisions to address concerns from various constituencies and try to win at least one Republican vote. Sen. Olympia Snowe, R-Wash., had pushed for modifications in the S corp provisions. The American Institute of CPAs and the National Society of Accountants have registered their opposition to raising taxes on professional services firms (see Accounting Groups Protest S Corp Tax Hike).

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