By Andy Sullivan and Donna Smith
WASHINGTON (Reuters) - Democrats in the U.S. Senate advanced a measure to help small businesses on Tuesday, less than two months before they face voters who blame them for an economy still burdened with high unemployment.
But they remained short of the votes they need to pass another top priority for President Barack Obama: ensuring that income tax rates do not rise at the end of the year for the vast majority of Americans.
With the unemployment rate stuck at 9.6 percent, economic issues are expected to dominate the congressional agenda in the handful of weeks before lawmakers adjourn for the November 2 elections.
The small-business bill, a long-stalled package of lending incentives and tax breaks, represents one of the final chances Democrats will have to show voters that they are working to create jobs and help the economy recover from the worst downturn since the Great Depression.
By a vote of 61 to 37, Democrats broke a Republican logjam and set up a final vote on the bill, possibly by the end of the week. The House of Representatives has already passed a similar version.
If the measure clears Congress, it would be a rare victory on the job-creation front for the Democrats, who have seen many of their other efforts blocked by Republicans this year.
On the tax front, victory appeared less certain for Democrats.
Tax cuts enacted during the presidency of Republican George W. Bush are set to expire at the end of this year if Congress does not act.
Obama wants to make those cuts permanent for all but the wealthiest 3 percent of U.S. households, arguing that the country cannot afford to extend them for families that earn more than $250,000.
Senate Democratic Leader Harry Reid declined to say whether he had the votes to make that happen.
"There's only one way of finding out, and that's to take a vote on it. I think Democrats all support it," Reid told reporters after meeting with his 59-member Democratic caucus.
All of the Senate's 41 Republicans and at least three Democrats and one Independent want the tax cuts also to be extended for top earners; it is unclear how many would vote against Obama's proposal.
TAX HIKE HURTS SMALL BUSINESSES?
Republicans argue that wealthier Americans are drivers of the economy and tax cuts for them help the whole country. Because many small-business owners file their business income as personal income, any tax increase in the top bracket could hurt them as well, they say.
Some of "our most productive, job-generating small businesses would be impacted by the tax increase in the middle of a recession," Senate Republican Leader Mitch McConnell said.
Republicans are poised to rack up big gains in the November elections, possibly winning control of the House and the Senate.
The sputtering U.S. economy is far and away the top concern of voters in Nevada, a Reuters/Ipsos poll said on Tuesday, where Reid is fighting for his political life.
Republican senators George Voinovich and George LeMieux broke with their party to support the Democrats' small-business bill.
LeMieux told Reuters Insider the bill would help the 2 million small businesses in his home state of Florida, many of which are struggling to get access to credit.
The bill would create a $30 billion fund that the government would invest in independent community banks to encourage lending to small firms.
It would also exclude from taxes all capital gains on sales of small business stock and ease tax rules for expensing and depreciation of equipment. Tax breaks in the bill total $12 billion. Industry groups back the bill.
Democrats estimate the measure could create 500,000 new jobs. Some 8 million jobs have been lost since the recession began in late 2007.
Anne Mathias, an analyst with the Concept Capital research group, said the bill's lending incentives probably would encourage banks to free up more capital to lend to small businesses, and the tax incentives could encourage more equipment purchasing over the coming months.
Smaller firms have complained that they have had trouble getting loans to expand following the 2007-2009 financial crisis, when many banks pulled back their lending activity.
Bernard Baumohl, head of the Economic Outlook Group in Princeton Junction, New Jersey, said the Federal Reserve could lower the interest rate it pays on bank reserves, to encourage banks to lend their money rather than stashing it at the central bank.
But ultimately, small businesses won't hire until the economy improves, he said.
The U.S. government's definition of what constitutes a "small business" varies by sector, but typically encompasses firms that employ fewer than 500 workers or take in less than $7 million in annual revenues. Those limits can be substantially higher for firms in certain business sectors, such as transportation.
(Additional reporting by Kim Dixon, Thomas Ferraro, Richard Cowan and Emily Kaiser; Editing by Leslie Adler)
