The White House and congressional leaders reached a deal Monday to avert sweeping tax increases set to start Tuesday.
The bargain would extend permanently most of the Bush-era tax cuts set to expire at 12:01 a.m. Tuesday, while allowing them to expire -- and taxes to increase -- on higher incomes. It would allow tax increases on every U.S. worker, however, because it would not extend the temporary cut in the payroll tax that finances Social Security.
With talks dragging on into the final hours of the year, the parties missed a New Year's Eve deadline to get legislation through Congress before the tax cuts expired at the end of the year. But action by the House and Senate by Wednesday -- if they approve the deal -- was expected to come in time to stop the broad income-tax increases that were to go into effect Tuesday.
With labor unions and liberal groups lobbying against the deal late Monday, Vice President Joe Biden went to Capitol Hill to meet with Senate Democrats, presumably to press for approval. The Democratic-controlled Senate hoped to vote Monday night, while the Republican-run House will return on New Year's Day for the first time in decades.
Senate Minority Leader Mitch McConnell, R-Ky., urged his colleagues to pass the tax agreement immediately and debate spending cuts in coming months.
"We will continue to work on finding smarter ways to cut spending, but let's not let that hold up protecting Americans from the tax hike," McConnell said. "We can do this. We must do this."
Negotiations over the "fiscal cliff" were one of the final acts for the 112th Congress -- which has the distinction of passing fewer bills into law than any Congress in decades -- before new members are sworn in Thursday.
But without a vote Monday, the Bush-era tax cuts expired at 12:01 a.m. Tuesday. The spending cuts, known as sequestration, would slash defense and domestic spending starting Wednesday, leading to fewer FBI agents, less housing assistance for low-income families and a delay in new equipment for the military.
Democrats pressed to delay the cuts by months, or even a year or more, but Republicans wanted the postponement to be offset by other cuts.
The tentative bargain includes significant concessions by Democrats and Republicans, though perhaps more for the GOP, which had been against any tax increase.
Paychecks, however, would shrink for every U.S. worker as a temporary cut in the payroll tax, enacted in 2011 to boost the economy, would end.
The income for individuals earning more than $250,000 and couples earning more than $300,000 would still be taxed more because some of the value of their exemptions and itemized deductions would be phased out.
The scaled-back package, which would raise about $600 billion in new revenue over the next decade from the wealthiest 2 percent of households, would also:
-- Extend unemployment benefits for 2 million Americans.
-- Prevent about 30 million taxpayers from having to pay the alternative minimum tax.
-- Keep Medicare payments to doctors at the current rate.
-- Extend tax credits for children and college tuition.
-- Provide tax breaks to clean-energy companies.
-- Raise the estate tax, but significantly less than Democrats had wanted. The value of estates over $5 million would be taxed at 40 percent, up from 35 percent.
-Taxes on capital gains and dividends would remain the same, 15 percent, for most taxpayers, but they would climb to 20 percent for top earners.
The compromise's future remained in doubt as both Republicans and Democrats publicly criticized the deal.