With Republican and Democratic leaders deadlocked over the issue in both chambers, two senators offered a bipartisan compromise that they said could help break the impasse before Congress adjourns for the year.
The proposal, devised by Senators Susan Collins, Republican of Maine, and Claire McCaskill, Democrat of Missouri, would extend the current payroll tax cut for employees and reduce the employer’s share of the payroll tax as well. It would also provide additional money for highways, bridges and other job-creating transportation projects.
It would offset the cost with a 2 percent surtax on income in excess of $1 million a year, but would carve out protection for many small-business owners who report business income on their personal tax returns.
“One of the primary objections to a surtax on very wealthy people has been its impact on small business,” said Ms. Collins, the only Republican who crossed the aisle and voted to take up the Democrats’ payroll tax bill last week. “That concern resonated with me. The fact that we have been able, in a bipartisan way, to come up with a means of protecting small businesses is potentially a breakthrough.”
Mrs. McCaskill said the fact of a bipartisan agreement on the explosive issue of taxes was remarkable — “a huge part of the battle right now.”
Democrats have never gotten more than 51 votes for their job and tax proposals, 9 short of the number needed to overcome procedural hurdles in the Senate. But they have put Republicans on the defensive, casting them as responsible for the possibility of a tax increase that could affect 160 million workers in January.
Mr. Obama tried to emphasize the political advantage at a White House news conference, saying a typical family would see a tax increase of about $1,000 next year in the absence of action by Congress.
“When the Republicans took over the House at the beginning of this year, they explicitly changed the rules to say that tax cuts don’t have to be paid for,” Mr. Obama said, striking a consciously puzzled tone. “So forgive me a little bit of confusion when I hear folks insisting on tax cuts being paid for.”
The Senate majority leader, Harry Reid of Nevada, and Senator Bob Casey of Pennsylvania unveiled the latest version of the Democrats’ proposal on Monday.
Senate Democrats scrapped Mr. Obama’s proposal to halve the payroll tax paid by employers. They kept his proposal to reduce the employee’s share — the tax paid by employees — to 3.1 percent of wages, from the current 4.2 percent. If Congress does nothing, the rate will revert to 6.2 percent in January.
The price tag for the bill was reduced by about one-third, to $185 billion from $265 billion, under the Democratic measure rejected by the Senate last week.
Democrats would make up for most of the lost revenue by imposing a surtax of 1.9 percent, starting in 2013, on modified adjusted gross income in excess of $1 million.
Senator Jon Kyl of Arizona, the No. 2 Senate Republican, denounced Mr. Reid’s proposal for its continuation of the payroll tax holiday.
“There’s no evidence that this temporary tax cut has actually produced any new jobs, which is the whole idea,” Mr. Kyl said, adding: “The surtax is, in reality, a new tax that primarily hits small-business owners. That’s who creates the jobs.”
The bill drafted by Ms. Collins and Mrs. McCaskill is meant to address that concern.
The future of the payroll tax cut is up in the air because of turmoil in Republican ranks. Mr. Kyl was one of 26 Republican senators who voted last week against a payroll tax cut bill drafted by party leaders. A similar proposal from House Republican leaders has encountered more resistance than expected from rank-and-file members of the party caucus.
The “millionaires’ tax,” in any form, is a nonstarter with many Republicans in Congress.
But Jenni R. LeCompte, a spokeswoman for the Treasury Department, said the proposed surtax “would affect only a very, very small number of small-business owners.”
“Only one percent of all small-business owners have adjusted gross income over $1 million and would be affected by this surcharge,” Ms. LeCompte said, citing a new study by Treasury’s Office of Tax Analysis.
The White House has decided that this is a week for the president to step up his campaign for an extension of the tax cut and jobless benefits, which begin to run out early next year for some of the long-term unemployed.
Ashley Parker contributed reporting.
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