US Senate leaders agreed last week to more than half the $726 billion in new tax cuts sought by President George W. Bush in order to win approval of next year's federal budget, sparking a bitter and unusual rift with Republican counterparts in the House of Representatives.
The Senate voted 51-50 - with Vice-President Dick Cheney stepping in to cast the decisive vote - to clear the government's 2004 tax and spending blueprint.
The House of Representatives earlier last Friday voted 216-211 to approve the plan, which projects record government budget deficits while making room for up to $550 billion in new tax cuts over the next decade.
To win vital backing for the budget from Republican moderates worried about rising deficits and the cost of the war in Iraq, however, Senate leaders were forced to promise to limit any new tax cut package to no more than $350 billion.
The budget only lays out the framework for Congress' actual tax and spending decisions later in the year.
By including the tax cuts in the budget - cuts which Bush says are needed to boost the weak US economy - they can be passed later by a majority in the closely divided, 100-member Senate rather than the 60 votes usually required.
"This means that, at the end of the day, the tax cut side of the growth package will not exceed $350 billion," said Senate Finance Committee Chairman Charles Grassley, an Iowa Republican. "The reality is the Republican caucus is split."
House and Senate Republican leaders had earlier arranged an unusual deal to clear the rest of the budget while agreeing to disagree on the size of the tax cuts until later this year, when a victory in Iraq might have strengthened President Bush's hand.
But the Senate's action will now make it very hard to push for any tax cuts above $350 billion, prompting a furious reaction from House Republicans who implied they had been double-crossed by their compatriots in the Senate.
"A deal is a deal and around here you are only as good as your word," fumed House Republican Conference Chairman Deborah Pryce of Ohio. "The goodwill of any further dealings or negotiations between the House and the Senate is at stake."
Two senior Senate Republican aides said the tax cut compromise had been personally approved by both Senate Republican Leader Bill Frist of Tennessee and Senate Budget Committee Chairman Don Nickles, an Oklahoma Republican.
"You can take (Grassley's) word," Mr Nickles said. "If he says it's not going to be more than $350 billion, it's not going to be." Republican leaders were facing great pressure to clear a budget after lambasting Democrats for failing to do so last year, when they controlled the Senate.
House and Senate tax writers plan to craft a final tax bill by early summer. The smaller tax cut would leave no room to eliminate taxes on corporate dividends, the centrepiece of President Bush's economic plan.
But White House spokesman Ari Fleischer said the Senate vote was "certainly not" the last word on the issue. "The last word has to be an agreement reached between the House and the Senate on their two proposals," he said.
Republicans say President Bush's plan will jolt the economy, boost government revenues and eventually shrink federal deficits.
Democrats argue it was his last round of tax cuts in 2001 that started the recent steep slide in the US fiscal position and say the new cuts will make a bad situation worse.
"This budget is not a document that represents a conservative approach to government," said North Dakota Sen. Kent Conrad, the Senate Budget Committee's top Democrat. "It is radical and it is extreme. It says deficits don't matter."
The plan will meet Bush's request that Congress hold the spending it controls to about $784 billion in 2004, a modest increase of around 2.4 per cent over the current fiscal year.
It projects government deficits of $347 billion in 2003, $385 billion in 2004 and $294 billion in 2005, all exceeding in dollar terms the previous record of $290 billion in 1992. It predicts an eventual return to surpluses by 2012 and a cumulative deficit of $1.4 trillion over the next decade.
The final budget does not include $265 billion in spending cuts the House had sought to government programmes ranging from farm subsidies to student loans in the next decade.
The House's passage of the budget bill automatically approved an increase of more than $900 billion in the government's $6.4 trillion statutory debt limit.
The US Treasury has been using accounting gimmicks since February to avoid piercing the cap. But aides said the Senate, which will have to act separately to raise the limit, was in no rush to take the unpalatable vote amid the tax cut debate.