Nightly News   |  December 17, 2011

Battle lines drawn with tax extension

The Senate passed a two-month extension of the payroll tax cut, setting Congress up for another battle over taxes and spending. NBC's Kelly O'Donnell reports.

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>>> now to washington and a contentious fight involving your taxes. and light a lock of bt of battles involving money this one came down to the last minute. our capitol correspondent kelly o'donnell joins us.

>> reporter: the senate passed a short term extension today of payroll tax cuts and unemployment benefits . this prolonged fight has been over how to cover the costs without adding to the deficit. so they worked a saturday, hoping to get things done before the holidays. but they actually set up another fight for just two months from now. nearly out of time.

>> the ayes 67, nays 32.

>> reporter: washington delivered on promises today, but the result showed the scars of gridlock. complaints about wasted money in the 1200 -page, $1 trillion spending bill that funds the government for the year.

>> this system is broken! john mccain says too many projects were not given scrutiny under the rush deadline.

>> $12.7 million for a cultural artifacts repository. that's in the name of defense.

>> reporter: turning to the fight over payroll taxes and unemployment benefits , a deal to extend the tax cut and benefits for one year failed. the senate could only agree on a two-month extension. that means instead of the average worker saving $1,000, it's down to $166 for now. the president is pleased taxes won't go up, but expects more.

>> it would be inexcusable for congress not to further extend this middle class tax cut for the rest of the year. it should be a formality. and hopefully it's done with as little drama as possible when they get back in january.

>> reporter: one issue had republicans high fiving. they insisted the keystone oil pipeline project that environmentalists oppose but supports including unions like because of jobs be added to this bill. even after the president threatened to veto earlier this month.

>> any effort to try to tie keystone to the payroll tax cut i will reject.

>> reporter: but democrats and republicans backed a requirement that president must decide within 60 days if the pipeline will be built and not wait until after the november election.

>> since most of us have not heard a good reason from the white house as to why they would block it, i'm very hopeful that president in the course of this 60 days, will do the right thing for the country, and get this crucial project under way.

>> reporter: senators settled on the smaller package because they could only agree on how to cover enough for that. $33 billion. and that includes a higher fee for homeowners who are buying or refinancing with a mortgage giant fannie and freddie. that's something that will affect people personally. and lester, this isn't quite over yet because the house still has to deal with it. some house republic ans are not liking the short term solution