Jobless aid bill hits deficit wall in Senate

WASHINGTON (AP) - President Barack Obama's plea for more stimulus spending as insurance against a double-dip recession hit a roadblock in the Senate on Wednesday, the victim of election-year anxiety over huge federal deficits.

A dozen Democrats joined Republicans on a key 52-45 test vote rejecting an Obama-endorsed, $140 billion package of unemployment benefits, aid to states, business and family tax breaks and Medicare payments for doctors because it would swell the federal debt by $80 billion.

The swing toward frugality runs counter to the advice of economists who support the bill's funding for additional jobless benefits and help to states to avoid layoffs of public service jobs. They fear that the economy could slip back into recession just as it's emerging from the biggest economic downturn since the Great Depression.

Federal Reserve Chairman Ben Bernanke warned last week that while lawmakers need to come up with a plan for tackling the nation's long-term deficit crisis, the U.S. recovery is still fragile. It's too early for large, immediate spending cuts, Bernanke said.

"We've got to do more to build on the existing jobs momentum and that's what these targeted measures are about," said White House economist Jared Bernstein.

The Senate earlier passed another version with even bigger deficits. But that was before tea party-backed candidates running on anti-deficit, anti-big government platforms began knocking off more established politicians in spring primaries.

Despite the loss, Democratic leaders predicted serenely that a scaled-back version of the measure - extending unemployment benefits for the long-term jobless and providing $24 billion in aid to the states - could pass, possibly as early as later this week, after relatively minor revisions.

"We need to change a few things," said Majority Leader Harry Reid, D-Nev.

Later Wednesday, Finance Committee Chairman Max Baucus, D-Mont., unveiled a new, slimmer version of the bill that he predicted would "provide a path forward."

But Republicans cautioned that the margin of Wednesday's vote was a bad sign for a bill that, even after revisions, would still likely add more than $50 billion to deficits over the next decade. Democrats would need 60 votes, 15 more than they got Wednesday, to prevent Republicans from blocking the bill.

"All I can tell you is that consensus about borrowing, debt, spending is growing stronger in our caucus and I think it is in the Democrats' as well," said Sen. John Thune, R-S.D.

Obama renewed his push for the measure last weekend, warning that "hundreds of thousands" of state and local government jobs could be lost without $24 billion in Medicaid money to help states balance their budgets and $23 billion more to prevent layoffs at local school districts around the country.

The new version released Wednesday afternoon would roll back last year's $25-a-week increase in unemployment checks and give doctors just a six-month reprieve from scheduled cuts in their Medicare payments instead of relief through 2011.

A new tax on investment fund managers - who presently pay taxes on much of their income at the 15 percent capital gains rate instead of the 35 percent top income tax rate - was pared back for venture capitalists. It would impose regular income taxes on only 50 percent of profits that are the result of sales of assets held for five or more years.

The lost receipts would be replaced with still more revenue from an increase in the per-barrel tax paid into the oil spill liability trust fund. Now limited to 8 cents a barrel, the tax would rise more than six-fold to 49 cents a barrel under the latest version of the bill - instead of 41 cents under the version killed on Wednesday.

But top Democrats were standing strongly behind $24 billion in help to state governments for the Medicaid health program for the poor and disabled. Some 30 states have incorporated the money into their budgets for the fiscal year starting July 1 and governors say that without it, they'll have to lay off thousand of workers.

"The effect on the economy of not doing this ... would be disastrous," Pennsylvania Democratic Gov. Ed Rendell said. "If we lose this (Medicaid) money, we will have to lay off 20,000 people."

"If states don't get this aid, they will be cutting payrolls very aggressively and it is a serious threat to the recovery," said Mark Zandi, chief economist at Moody's Analytics.

The renewed stimulus money is part of a catchall measure combining the jobless aid and help for states with the renewal of dozens of popular tax breaks for businesses and individuals, including a property tax deduction for people who don't itemize, lucrative credits that help businesses finance research and develop new products, and a sales tax deduction that mainly helps people in states without income taxes.

The urgency to pass the measure is palpable since Medicare announced earlier this week that a 21 percent cut in reimbursements to physicians would take effect on Friday. And by the end of the week, more than 900,000 people out of work for more than six months will have been ineligible to apply for continued benefits, according to the latest Labor Department estimates.