WASHINGTON (Reuters) - Angry Democrats in the U.S. House of Representatives on Thursday rejected President Barack Obama's plan to extend low tax rates, as the Senate scheduled a vote on the measure, which has significant Republican support.
The House Democrats' rebellion gives Obama another political headache just over a month after he took a beating in congressional elections, although it will not necessarily derail the tax plan.
In a raucous, closed-door meeting on Capitol Hill, mutinous Democrats chanted: "Just say no!" as they vowed to overhaul Obama's plan to extend lower tax rates for nearly all Americans, according to lawmakers in the room.
But in the Senate, the plan took a significant step forward as Democrats unveiled legislation late in the day that reflected the terms the White House had reached with Republicans. The Senate bill adds a subsidy for ethanol but leaves out the Build America bonds program popular with Democrats and local governments.
Senate Majority Leader Harry Reid set a vote for Monday at 3 p.m. (2000 GMT).
Obama said on Thursday he expected the agreement would eventually pass.
"Here's what I'm confident about, that nobody, Democrat or Republican, wants to see people's paychecks smaller on January 1st because Congress didn't act," Obama told NPR News in an interview due to air on Friday at 5 a.m. (1000 GMT).
Obama's plan would keep lower rates in place for another two years, reduce the estate tax, and extend tax breaks and other benefits aimed at lower-income Americans.
Economists say it could boost the sluggish economy at a time when Congress has no appetite for spending-based stimulus efforts.
Democrats have argued that the revenue that would be lost by extending tax breaks for the wealthiest 2 percent of U.S. households can be put to better use at a time when unemployment is close to 10 percent.
Tax bills will rise in January by an average of $3,000 per household if Congress does not act.
After Democrats suffered substantial losses in the November elections, Obama grudgingly accepted a rare compromise on taxes with the Republicans, who will take control of the House and wield greater clout in the Senate in January.
Obama now must now quell an insurrection from the liberal wing of his own party. Under the resolution approved by House Democrats, his plan would not even come up for a vote in that chamber.
The plan will cost roughly $850 billion over 10 years, according to a congressional estimate by the Joint Tax Committee, deepening budget deficits that are already at their highest levels relative to the economy since World War Two.
Bond markets slumped this week on fears the tax cuts would put too heavy a burden on the budget, but U.S. Treasuries prices rose on Thursday as investors reckoned the sell-off was overdone.
ESTATE TAX 'GIVEAWAY'
A Democratic bill that would allow the tax breaks to expire for the wealthiest households passed the House last week, but failed in the Senate.
Although it is unlikely a similar measure would pass the Senate on a second try, House Democrats could try to toughen the estate tax, an element of Obama's package that House Speaker Nancy Pelosi called "a giveaway" after the meeting.
"The estate tax ... is a bridge too far for many of our members," Pelosi said.
The estate tax, which lapsed at the beginning of this year, is due to kick in again in January at a rate of 55 percent for estates worth more than $1 million. Obama's plan would lower that rate to 35 percent for estates worth over $5 million.
House Democrats are also pushing hard for a two-year extension of tax breaks for the renewable-energy industry that they say will bolster tens of thousands of jobs in the budding solar and wind-power sectors.
Many House Democrats blame Obama for the heavy losses they suffered in the congressional elections, feeling he failed to defend them adequately and go after Republicans. Their decision to reject the deal came a day after Vice President Joe Biden met with them in an unsuccessful effort to drum up support.
"He said, 'Take it or leave it,' and we said, 'Leave it,'" Representative Lloyd Doggett said.
Many Democrats say the tax deal could set a bad precedent for the coming two years by showing Republicans Obama is quick to compromise.