Senate Majority Leader Harry Reid (D-Nev.) and Republican Leader Mitch McConnell (Ky.) are working on an agreement to avoid across-the-board tax hikes and plan to show it to colleagues Sunday. 

Senate leaders emerged optimistic from a Friday afternoon meeting at the White House with President Obama, Speaker John Boehner (R-Ohio) and House Democratic Leader Nancy Pelosi (Calif.). Vice President Biden and Treasury Secretary Timothy Geithner also attended.

Obama told reporters late Friday there is still time to reach a deal.

{mosads}“I just had a good and constructive discussion here at the White House with Senate and House leadership about how to prevent this tax hike on the middle class and I’m optimistic we may still be able to reach an agreement that can pass both houses in time,” he said in a live statement to the press after which he declined to take questions.

If the Senate fails to produce an agreement, Bush-era tax rates on income, capital gains, dividends and inheritances would rise to Clinton-era levels and $110 billion in discretionary spending cuts would take place in 2013.

Congressional failure would also send financial markets tumbling. Wall Street suffered its fifth-straight decline Friday amidst growing uncertainty over Democrats and Republicans resolving their differences.

Senate Democrats say the default proposal to prevent tax hikes is one that would extend the Bush-era tax rates, extend unemployment insurance and create a framework for deficit-reduction legislation in the next Congress.

Reid immediately put the onus on McConnell to suggest changes to that base bill so it could win backing from Republican senators.

“At President Obama’s request, I am readying a bill for a vote by Monday that will prevent a tax hike on middle-class family income up to $250,000, and that will include the additional, critical provisions outlined by President Obama. In the next twenty-four hours, I look forward to hearing any good-faith proposals Senator McConnell has for altering this bill,” Reid said in a statement Friday evening.

Both Reid and McConnell sounded hopeful they could craft an agreement over the next 24 to 36 hours, although Reid said he was under no illusion that members of his caucus would accept it without complaint.

“I’m going to do everything I can. I’m confident Sen. McConnell will do the same. But … whatever we come up with is going to be imperfect. Some people aren’t going to like it. Some people will like it less. But that’s where we are,” Reid said.

Reid has scheduled a Democratic caucus meeting for Sunday afternoon to give his colleagues a chance to weigh in on a potential deal.

McConnell said he would do the same.

“We are engaged in discussions — the majority leader and myself and the White House — in the hopes that we can come forward as early as Sunday and have a recommendation that I can make to my conference,” McConnell said. “And so we’ll be working hard to try to see if we can get there in the next 24 hours.”

Senate Democratic leaders have insisted that Boehner give them an assurance that if the Senate passes legislation addressing the fiscal cliff, he will schedule it for a vote in the House.

Senate leaders left Friday’s meeting with the understanding that Boehner would let a bipartisan Senate deal have an up-or-down vote.

“Boehner was at the meeting where this process was arranged,” said a Democratic aide. “In keeping with the process, Boehner has signaled he could support it.”

An aide to Boehner said the Senate must act first.

“The Speaker told the President that if the Senate amends the House-passed legislation and sends back a plan, the House will consider it — either by accepting or amending,” the aide said. “The group agreed that the next step should be the Senate taking bipartisan action.”

Senate Democrats, however, suspect Boehner may not bring a Senate-passed bill to the House floor until after he is elected Speaker on Jan. 3.

Senate aides say several high-priority provisions are on the table in the Reid-McConnell talks.

Chief among them are extensions of the income tax rates for middle-class families, the estate tax rate, now set at 35 percent, and the tax rate on dividend income, which would jump from 15 percent to ordinary income-tax levels.

Democrats want to add a package of expiring business tax provisions, including tax breaks for renewable energy production, and an extension of unemployment benefits.

Senate sources say McConnell will likely demand the threshold for extending the Bush-era income tax rates be set at $400,000 for family income, instead of the $250,000 level Obama made a centerpiece of his re-election campaign. Extending the 35-percent tax rate on inheritances — along with the exemption for estates under $5 million per spouse — is another priority of Republicans. The rate will jump to 55 percent and the exemption will drop to $1 million at the beginning of next year.

Conservative senators said they would strongly consider voting for a partial extension of the Bush tax rates, even if it resulted in families earning over $400,000 or $500,000 paying more to the federal government next year. Several said they would have a bigger problem in voting for unemployment benefits.

“I think there are a lot of things that people would vote for if it were just setting the limit of how many people you’re going to save from drowning,” said Sen. Rand Paul (R-Ky.), who compared paying higher tax rates to drowning. “But they’re going to add other stuff that will hurt. A lot of conservatives are concerned about delaying the [economic] recovery by adding another $100 billion to unemployment insurance.”

Conservative senators such as Paul think extended federal unemployment benefits undermine people’s incentive to look for jobs.

If Reid and McConnell fail to reach agreement by Sunday, Reid will bring to the floor a bill that extends income tax rates on family income below $250,000 and unemployment benefits and dare Republicans to vote against it.

“If an agreement isn’t reached in time between Senator Reid and Senator McConnell, then I will urge Senator Reid to bring to the floor a basic package for an up or down vote, one that protects the middle class from an income tax hike, extends the vital lifeline of unemployment insurance to two million Americans looking for a job and lays the groundwork for future cooperation on more economic growth and deficit reduction,” Obama said Friday.

The president pronounced himself “modestly optimistic” a deal would be reached.

–This report was originally published at 5:33 p.m. and last updated at 10:00 p.m.