The Senate on Wednesday rejected a $140 billion taxes and spending package in a resounding defeat for President Obama and Democratic leaders that signaled the era of freewheeling stimulus spending is giving way to greater concern for deficits.
Hours later, chastened Democrats produced a pared-down version they said spent less and found offsetting tax increases to pay for most, though not all, of the new measure, which includes unemployment benefits and aid to states.
“There are fewer dollars involved here, and it is more paid-for,” said Finance Committee Chairman Max Baucus, Montana Democrat, acknowledging the 11 Democrats and one independent who sided with Republicans in blocking his first version. “We heard what those senators were saying and we have adjusted the amendment accordingly.”
Republicans said the vote - in which Democrats fell 15 votes shy of the 60 needed to allow for the overspending - marked a new attitude for lawmakers who are beginning to worry about debt and deficits as they prepare to face voters in November. It would have swelled the federal debt by $80 billion.
Three months ago, a similar bill passed the Senate with bipartisan support, but this time 40 Republicans, 11 Democrats and one independent voted against it.
“The Democrats have maybe reached the threshold, the limit, which they can call on their people to continue to support spending that’s not paid for,” said Sen. John Thune, South Dakota Republican.
The vote came just a few days after Mr. Obama made an unusual plea in a late-night Saturday letter for Congress to pass the measure, and its failure underscores growing tension between the White House and Democrats over the direction of spending. The measure includes business and family tax breaks and Medicare payments for doctors.
State leaders say the $24 billion in aid to states is needed to avoid public-sector layoffs. Some economists say the stimulus spending is needed to stave off a double-dip recession.
“If states don’t get this aid, they will be cutting payrolls very aggressively and it is a serious threat to the recovery,” Mark Zandi, chief economist at Moody’s Analytics, told the Associated Press.
The new version Senate Democrats introduced Wednesday evening costs less because it cuts some spending and adds billions of dollars in tax increases.
The chief tax increase would require investment-fund managers to pay income taxes on part of their income, rather than the lower capital-gains rate. The major reductions to the measure’s spending come from dropping a proposed $25-per-month increase in unemployment benefits, and shortening a boost in doctor payments under Medicare from 19 months to 16 months.
Mr. Baucus’ first version cost $140 billion, of which about $60 billion was funded through cuts and tax increases.
Majority Leader Harry Reid, Nevada Democrat, issued a statement blasting Republicans for their opposition, but he was silent on the 12 members of his caucus who also blocked the bill.
“I am disappointed that despite high unemployment numbers in Nevada and across the nation, not one Republican voted to provide out-of-work Americans the support they need to make ends meet,” he said.
Voters tell pollsters that spending is a major issue this year, and with the country’s debt having topped $13 trillion last month the issue has only grown more acute.
Still, while senators showed they were willing to pare down new spending, lawmakers have turned back efforts to enact full-fledged cuts.
Mr. Thune will provide a test of that on Thursday, when the Senate is scheduled to vote on his proposal to cut 5 percent of discretionary funding from all but the Defense and Veterans Affairs departments. It would also cut money that was approved but has not yet been spent from last year’s $862 billion stimulus package.
Democrats, who for months had defeated every effort to undo parts of the stimulus, now appear conflicted on whether to go down that path.
House Majority Leader Steny H. Hoyer, Maryland Democrat, said this week that tapping unspent stimulus money is an option. He said the point of the stimulus was to stabilize the economy and boost jobs, so moving some of the unspent money to programs that Democrats believe would have an immediate effect on preserving teachers’ jobs makes sense.
But the White House and Senate leaders have been cool to the idea of changing the stimulus midstream, and Mr. Obama’s spokesman, Robert Gibbs, last week rejected the idea of cuts.
“One of the things that we’ve got to be careful about is choking off the economic recovery,” he said.
With spending requests piling up, though, Democrats’ job is getting more complicated.
The Pentagon says Congress needs to act on an emergency war-spending request Mr. Obama submitted in February to fund a troop surge in Afghanistan.
That bill, however, has become mired as key Democrats insist it also include non-war items such as money for states to keep state and local government workers.
Defense Secretary Robert M. Gates initially set a Memorial Day deadline for completing the bill, and now says it must pass by Independence Day or else the Defense Department will have to cut funds and stop projects.
“We begin to have to do stupid things if the supplemental isn’t passed by the Fourth of July recess,” he said.
He said money for the Navy and Marine Corps to fight the wars in Afghanistan and Iraq will begin to run out of money in July, and that will mean having to cut other programs to continue operations.