April 7 (Bloomberg) -- Republican lawmakers who control the U.S. Congress failed to reach an agreement that would resolve top-priority tax and budget measures before they adjourn for a two-week Easter break.

Final negotiations between the House and Senate on legislation to extend low rates on investments and prevent a $31 billion tax increase on more than 15 million households collapsed late yesterday over dispute on how many households to spare the increase and a proposal to include a business tax cut.

House Republicans also were unable to bridge internal divides over a 2007 budget measure that Democrats said would cut health and education programs for families.

The separate measures represent Republicans' two main priorities of extending President George W. Bush's 2003 tax cuts on dividends and most capital gains and paring spending in a $2.8 trillion budget plan for the fiscal year starting Oct. 1. Democrats said the failure to complete work on both measures signals mounting disunity in Republican ranks.

``Without the support of a single Democrat, and their party in disarray, Republicans are on the run,'' said House Minority Leader Nancy Pelosi, a California Democrat.

Talks may resume on the tax measure later this month, said Senate Finance Committee Chairman Charles Grassley, an Iowa Republican.

`Close to Agreement'

``We were very close to an agreement,'' Grassley said in an interview today. He said lawmakers had agreed to include the ``cornerstone'' provisions of House- and Senate-passed legislation to extend low rates on investments and temporarily limit the alternative minimum tax while differing on how to achieve the latter goal.

The Senate version of the legislation would spare 3.5 million more households from the alternative minimum tax than the House proposal, Grassley said. He also objected to renewing a corporate tax break that helps financial services companies such as General Electric Co. and Citigroup Inc. that operate overseas.

``I didn't want to be defending a bill that would tax three and a half million middle-income Americans with the alternative minimum tax and at the same time we're using that revenue to give loopholes to corporate America,'' Grassley said.

The delay on the budget raises the possibility that Republicans won't be able to pass a budget resolution this year. House Majority Leader John Boehner said the chamber may take up the plan again after the spring recess.

`Earmarks'

``I remain committed to working with all members to reach agreement on budget process reforms so we can move forward with the budget after the Easter district work period,'' Boehner said in a statement.

The House adjourned yesterday and the Senate is scheduled to today. The Senate will return on April 24, while the House is set to resume the following day.

Representative Jeff Flake, an Arizona lawmaker who's a member of the Republican Study Committee, a group of lawmakers that advocates fiscal restraint, said the budget got hung up on his group's call for new restrictions on ``earmarks.''

Flake's group wants those special projects, which benefit specific programs in particular congressional districts, subject to separate approval by the House on a case-by-case basis. Flake said other Republican lawmakers balked at that proposal.

``They still want to be putting in earmarks in the middle of the night,'' he said.

Tax Deadline

The tax measure, which lawmakers had been discussing over the previous 48 hours, fell apart because of the ``complex'' nature of the talks, Frist said.

The suspension of the talks dealt a blow to Frist and the Bush administration, which had urged lawmakers to reach agreement before the tax return filing deadline this month.

Grassley said once lawmakers iron out their differences, a final measure will pass Congress ``without a doubt.''

Montana Senator Max Baucus, the top Democrat on the Finance Committee, said in an interview he agrees lawmakers will eventually reach agreement. That agreement may fall short of a two-year extension identified by Grassley as one of the ``cornerstones,'' Baucus said.

Grassley and House Ways and Means Committee Chairman Bill Thomas, a California Republican, have been sparring since November over how to craft a $70 billion tax-cutting measure authorized by last year's budget.

Research Credit

The House made extending until 2010 the 15 percent rate on dividends and most capital gains the centerpiece of its legislation, while the Senate passed a measure that would spare 15 million American households an increase this year because of the alternative minimum tax.

Without an extension, the rate on most capital gains will increase to 20 percent on Jan. 1, 2009, while dividends will be taxed at ordinary income tax rates of up to 35 percent.

Over the last five months, Grassley and Thomas have said there isn't enough room in the legislation for both provisions and dozens of other smaller tax breaks, including renewal of a research tax credit worth more than $5 billion a year to companies like Redmond, Washington-based Microsoft Corp. and Hewlett-Packard Co., based in Palo Alto, California.

Republicans had attempted to craft the budget plan with little input and no support from Democrats, leaving them entirely reliant on themselves for the votes needed to pass the plan.

Different Factions

The delay left different factions within the party pointing fingers. Representative Jerry Lewis, a California Republican who heads the Appropriations Committee, which has jurisdiction over spending measures, said proposals to curb earmarks and emergency spending would have made it more difficult to pass a budget.

``I cannot and will not support a resolution that greatly diminishes Congress' ability to respond to national disasters and makes it more difficult for us to get our budget work done on time,'' he said in a statement.

Meanwhile, some Republican lawmakers balked at the Bush administration's proposal to cap so-called discretionary spending at $873 billion.

``Our position is that having the right budget is more important than having a budget,'' said Representative Mike Castle of Delaware. He had demanded an additional $7 billion for health care and education programs.

The budget resolution sets the overall parameters for this year's budget debate; without one, lawmakers are more likely to approve spending that increases the federal deficit. The resolution determines how much lawmakers will spend on discretionary programs, the one-third of the federal budget subject to annual congressional review. It also determines whether Congress will attempt to cut politically sensitive entitlement programs such as Medicare.

Medicare

The Bush administration has proposed cutting Medicare and other entitlements by $65 billion over the next five years, while capping discretionary spending at $873 billion. That would have probably required cutting many domestic programs, a move resisted by many lawmakers in an election year.

The Senate last month approved a budget plan that limits discretionary spending at $889 billion, while sparing entitlement programs and allowing oil drilling in the Arctic National Wildlife Refuge in Alaska.

The House Budget Committee approved a $2.8 trillion budget plan last week rejecting the administration's call to cut Medicare spending while endorsing its proposal to cut much of the rest of the budget.

To contact the reporter on this story: Ryan J. Donmoyer in Washington at rdonmoyer@bloomberg.net

Last Updated: April 7, 2006 13:12 EDT