Congressional aides from both parties have begun discussing a temporary extension of tax cuts enacted under former President George W. Bush, including those for higher earners, laying the groundwork for a possible deal this month.
The conversations, described as preliminary, have been separate from the formal negotiation among lawmakers and Obama administration officials that began on Wednesday. Those negotiations were described as "productive" by people with knowledge of the situation, although Republicans and Democrats publicly remain far apart.
Most Democrats favor permanently extending the Bush-era tax cuts for families making less than $250,000; Republicans want to extend them for everyone, including higher earners. The tax cuts are due to expire at year's end.
A growing number of observers from both parties believe all the talks ultimately are headed toward the same result—a temporary extension of cuts for all the tax levels.
The talks among congressional aides, which have taken place over the past few weeks, have considered short-term extensions of a number of business and individual tax provisions that are expired or expiring, such as a popular research credit and middle-class protection from the alternative minimum tax.
The most likely scenario includes a one-to-three-year extension of the Bush-era income-tax rates and a two-year extension of the business provisions, according to aides. That is likely to be combined with Democratic priorities such as extension of tax breaks that benefit the working poor, as well as further extension of unemployment benefits for the long-term jobless.
Despite the discussions, stalemate still looms as a possibility. The path to an agreement promises to be rocky, with congressional votes on partisan alternatives being planned as soon as Thursday in an effort to reassure party loyalists.
Still, White House officials expressed optimism about a bipartisan compromise, following an initial meeting in the more formal negotiations that began Wednesday among congressional leaders, Treasury Secretary Timothy Geithner and White House budget director Jacob Lew.
"We're in the midst of productive discussions and negotiations around what I think everybody agrees is an issue that has to get done in taxes," said White House spokesman Robert Gibbs. "I think we can get some substantive agreements."
An agreement on temporary extension of all the current rates and breaks would represent a breakthrough after months of infighting. It would signal lawmakers' intent to avoid the economic harm, and public outrage, that could result if the two sides failed to reach a tax deal this month.
Unless Congress acts before Dec. 31, tens of millions of people could see the taxes withheld from their paychecks go up almost immediately. Many retailers and economists worry that this, in turn, could tamp down household spending and further weaken employment and the fragile recovery.
Underscoring that risk, the commissioner of the Internal Revenue Service, Douglas Shulman, sent a letter to lawmakers on Wednesday, warning that postponing extension of some breaks, such as a measure to diminish the bite of the alternative minimum tax, could be "extremely detrimental" and risk significantly delaying refunds.
Rather than take that chance, both parties appear resolved to make a serious effort to reach a deal in the next few weeks.
But even as negotiators began meeting in search of a compromise, both sides were digging in for a public fight. Senate Republican Leader Mitch McConnell (R., Ky.) sent a letter to Majority Leader Harry Reid (D., Nev.) that essentially threatened to filibuster any legislation that doesn't address the GOP's two top priorities for the lame-duck Congress: extending the Bush tax cuts and keeping the government funded after the current continuing resolution expires Friday.
"While there are other items that might ultimately be worthy of the Senate's attention, we cannot agree to prioritize any matters above the critical issues of funding the government and preventing a job-killing tax hike," said the letter, signed by all 42 Republican senators—one more than the 41 votes needed to sustain a filibuster.
That throws up a roadblock before an array of other issues that Mr. Reid has proposed to bring forward in the Senate, among them bills to liberalize immigration law, repeal the Pentagon's "don't ask, don't tell" policy on gays serving openly in the military and extend unemployment benefits that expired Tuesday.
Some Democrats took umbrage at the Republicans' unified move. "It's obstruction," said Sen. Dianne Feinstein (D., Calif.). "It's obfuscation. It brings this body to a halt."Sen. Tom Harkin (D., Iowa) accused Republicans of trying to hold a pending nuclear-weapons treaty hostage to win tax cuts for the upper brackets. He said the year-end settlement might have to include more issues, such as the weapons treaty, for Democrats to support the upper-income tax cuts.
Write to John D. McKinnon at john.mckinnon@wsj.com
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