By GREG HITT And SARA MURRAY
WASHINGTON—Spooked by concern about deficits, the Senate shelved a spending bill that included an extension of unemployment benefits, suddenly cutting off a federal cash spigot opened by President Barack Obama when he took office 18 months ago.
The collapse of the wide-ranging legislation means that a total of 1.3 million unemployed Americans will have lost their assistance by the end of this week. It will also leave a number of states with large budget holes they had expected to fill with federal cash to help with Medicaid costs.
The impasse has been weeks in the making and reflects the deepening concern on Capitol Hill with the nation's fiscal situation, as well as a hardening of Republican opposition. Democrats had moved several times to pare the cost of the bill in an effort to win support from centrist Republicans and to make up defections from their own ranks.
On Thursday, Senate Democrats failed to secure the 60 votes needed to break off a GOP-led filibuster. Sen. Ben Nelson (D., Neb.) voted with Republicans in a 57-41 roll call. Senate Majority Leader Harry Reid (D., Nev.) said this third vote on the matter would be the last, allowing the Senate to move on to modest legislation cutting taxes for small businesses.
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Obama administration officials have argued that cutting off government support for the economy too quickly could harm the nascent recovery, and have been pressing both Congress and their international peers to keep the cash flowing. Conservative economists, Republicans and some European leaders say deficit reduction should be a higher priority. The sudden move by Congress provides an unexpected test of that argument.
Up in the air are other provisions that were to be included in the legislation, including some $50 billion in new taxes designed to help offset its cost. They included an increase in levies paid by private investment groups, including hedge-fund firms and real-estate partnerships, a provision long sought by some Democrats that will likely return another day.
Under a program initially enacted last year—which expired June 2—jobless workers could receive up to 99 weeks of aid, including 26 weeks of basic assistance provided by states plus longer-term federal payments. The Labor Department estimates that the long-term unemployed, meaning those out of a job for at least six months, make up 46% of all jobless workers in the U.S.
There are economic risks in ending benefits. Workers receiving them tend to funnel money back into the economy immediately, helping prop up demand and jobs.
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In addition, said Harvard economist Lawrence Katz, if workers are unable to find work and no longer eligible for unemployment benefits, some will turn to other government programs, such as disability and Social Security. "If you're really concerned about the long-term deficit, you should be really concerned about the long-term unemployed," Mr. Katz said.
Other economists argue that extended benefits have played a part in keeping people out of the labor force. "There's a very large body of research that says that more generous benefits and benefits that last longer…encourage people to stay out of work longer," said Bruce Meyer, an economist and public policy professor at the University of Chicago.
James Sherk, a labor economics analyst at the conservative Heritage Foundation think tank, said that while it could be argued that the benefits made available last year were too extensive, cutting off workers who expected to receive the full 99 weeks of benefits isn't ideal either. "You don't sort of pull the rug out from someone halfway through," he said.
The labor market is slowly improving, which could make the transition to fewer weeks of benefits easier. "I don't think there's going to be a big disaster by letting the extended unemployment insurance expire," said Phillip Swagel, a former Bush Treasury official and a Georgetown University professor. Still, he said, "it's going to be tough for some people."
With unemployment expected to remain high for months, Democrats argued the government should not pull back. Struggling families "are counting on us to come through," Senate Finance Chairman Max Baucus (D., Mont.) said before the final vote. Democrats Thursday night weren't talking about returning to the bill any time soon, if at all.
Sen. Reid lashed out at Republicans immediately after the vote, saying they had "turned a deaf ear" to jobless workers. "This is not a good day for America," he said. The leader said the Senate would turn next to a small-business tax bill, and give up for now on efforts to push forward with the jobless-benefits extension. Asked whether it could ever be brought back to the floor, he snapped: "You are going to have to talk with Republicans."
Republicans said the government can't afford further increases in the budget deficit, expected to reach $1.4 trillion this fiscal year, and said that Democrats have lost sight of the economic risks posed by the nation's rapidly mounting total debt.
In the give and take, the contours of the 2010 midterm election debate have become clear. Senate Minority Leader Mitch McConnell (R., Ky. ) chided Democrats for refusing to fully pay for the legislation with offsetting savings or revenue increases.
"The principle Democrats are defending is that they will not pass a bill unless it adds to the deficit," Sen. McConnell said.
The bill would also have provided aid to cash-strapped states, created a youth summer jobs program, and renewed several lapsed tax breaks, including a credit to support business research.
The last version of the legislation had a price tag of $85.5 billion. That was down some $20 billion from last week and well below the more than $120 billion bill initially brought to the floor. Even after the changes, the bill added about $35 billion to the deficit, roughly the cost of the six-month extension of jobless benefits in the bill.
Deficit concerns weren't the only issue for senators. Nebraska Sen. Nelson, an opponent of the legislation, cited deficit concerns but also said that the tax on investment partnerships would discourage real-estate deals.
One element that will survive in a different form: a proposal to suspend a 21% cut in Medicare payments to doctors that's set to take effect this month. That was stripped from the bill last week in a cost-cutting step and sent to the House as a stand-alone measure. The House, voting 417 to 1, approved the six-month suspension of the cuts late Thursday.
—John D. McKinnon contributed to this article.
Write to Greg Hitt at firstname.lastname@example.org and Sara Murray at email@example.com