By SIOBHAN HUGHES
WASHINGTON—The House and Senate on Friday approved a two-month extension of the payroll-tax cut, averting an increase that would have left workers with less take-home pay next year.
Passage came after a nearly weeklong impasse that ended when House Speaker John Boehner (R, Ohio) bowed to increasing pressure from within his own party and agreed to the short-term extension.
The $33 billion package also provides extended federal unemployment benefits for two months, avoids a cut in payments to doctors who treat Medicare patients and compels the Obama administration to act within 60 days on a permit for TransCanada Corp.'s proposed Keystone XL pipeline expansion.
The deal, which forestalls a Jan. 1 tax increase on 160 million workers, represents a retreat for the House GOP, which had been at odds with Senate Republicans and party elders who feared a backlash in the 2012 elections if the tax break was allowed to expire.
The agreement is essentially the same package negotiated by the Democratic-controlled Senate that Mr. Boehner's House rejected earlier this week.
One difference in the new agreement is the elimination of a Senate-crafted provision businesses believed would be burdensome. That provision would have changed the way payroll taxes would have been deducted for higher-paid workers, a move that would have meant changing payroll systems.
Mr. Boehner changed course a few hours after Senate Minority Leader Mitch McConnell (R., Ky.) stepped into the debate and urged House Republicans to pass the two-month extension approved by the Senate last Saturday in an 89-10 vote. As part of the new deal, all sides committed to negotiating early next year on a full-year extension of the tax break.
The impasse was a rare split between the two Republican leaders, who for most of this year have worked hand in glove to battle President Barack Obama. The split reflects, in part, the pressure Mr. Boehner faces from the GOP's tea-party faction, compared with Mr. McConnell, who is more willing to accept tactical victories.
Mr. Boehner's leadership within his own caucus may suffer new strains from the retreat, the latest in a string of tussles he has had with rank-and-file members this year on issues ranging from government funding to the debt ceiling. When he announced his decision to compromise in a 10-minute conference call with Republicans around the country Thursday evening, Mr. Boehner took no questions.
The House GOP, in appearing to risk allowing the tax break to lapse Jan. 1, did some damage to the party's reputation of holding the line on tax increases. The standoff also threatened what had been a major victory for Republicans: including a provision in the original tax agreement to force Mr. Obama to make a quicker decision on building the Keystone XL pipeline, which the president had previously punted until after the 2012 elections. That provision remains in the new agreement.
So topsy-turvy were the politics Thursday that it brought the spectacle of Mr. Obama endorsing the words of Mr. McConnell, the man who began 2011 pledging to do all he could to prevent the president's re-election.
"Democrats agree with the Republican leader of the Senate," said Mr. Obama. "This is an issue where an overwhelming number of people in both parties agree. Has this place gotten so dysfunctional that even when people agree to things, we can't do it?"
Announcing the pact on his Twitter feed, Mr. Boehner said the agreement was designed to "ensure taxes do not increase for working families on January 1 while ensuring that a complex new reporting burden is not unintentionally imposed on small business job creators."
At issue is extending the current 4.2% payroll tax levied to fund Social Security, rather than allowing it to return to 6.2% on Jan. 1, its rate before this year. House Republicans, in pushing for a full-year extension of the tax break, have cast their position as one of principle over politics. They conceded Thursday that they were losing the public-relations battle by their fighting.
"We're not doing this for the politics," Rep. Greg Walden (R., Ore.) told reporters. "You all have pointed this out pretty clearly."
Speaking to reporters Thursday evening, Mr. Boehner acknowledged that his party might suffer from picking this fight. "It might not have been politically the smartest thing in the world," he said. "Sometimes it's hard to do the right thing and sometimes it's politically difficult to do the right thing."
A growing number of Republicans urged the House this week to cut their political losses and pass the short-term extension. Those making that push, including GOP presidential candidate Newt Gingrich and former GOP presidential nominee John McCain, made their case even louder on Thursday.
"At this point, the House should pass the Senate's short-term extension to ensure 160 million hard-working Americans won't lose important tax relief at the end of this year,'' said Sen. Olympia Snowe (R., Maine).
No voice was more important than that of Mr. McConnell, who had been silent as the storm brewed. He had considered the Senate deal a big Republican victory because it included language on the Keystone pipeline.
Instead of seen as backtracking on the oil pipeline and his demand for a one-year extension, President Obama this week became the defender of a two-month tax cut. The White House mounted a daily public-relations effort to advocate extending the tax cut, but in the end, White House officials believed Mr. McConnell's statement Thursday was key to expediting the drama's conclusion.
Before agreeing to the new deal, Republicans insisted on language to address a problem businesses face in the two-month extension, aides said. The Senate bill imposed a cap on how much salary would be subject to the lower tax rate. That was dropped in an effort to be sure businesses can process payroll taxes under the accounting structure now in place, a House GOP aide said.
The bill's $33 billion cost is expected to be covered by an increase in fees charged to mortgage lenders by government housing agencies Fannie Mae and Freddie Mac. That has been criticized by the firms' regulator and industry analysts, who say it will complicate the task of revamping the mortgage giants.
The fee increase, expected to raise about $35.7 billion in revenue over 10 years, likely would be passed on to new-home buyers, raising their monthly mortgage payments by as much as $15 on mortgages of $210,000.
—Janet Hook, Laura Meckler and Kristina Peterson contributed to this article.