Negotiations stalled Saturday night when Minority Leader Mitch McConnell pushed a Social Security benefit cut as a way to offset spending measures including emergency unemployment benefits.
Democrats balked, leaked the offer to the media, and Republicans quickly retracted the demand.
That's allowed talks to resume in earnest, though the parties remain divided over key tax and spending issues including the estate tax, the alternative minimum tax, capital gains tax rates, top-bracket income tax rates, unemployment benefits, Medicare physician payments, the sequester and the debt limit.
In a tremendous irony, Republican requests for lower tax rates, a high estate tax threshold, and a permanent AMT fix -- combined with Democratic requests to delay the sequester, include a "doc fix" for Medicare physicians, and extend emergency unemployment benefits -- have left the parties negotiating toward a plan that would result in no net deficit reduction over 10 years on a current-policy baseline, according to Senate Majority Whip Dick Durbin.
Congress created the fiscal cliff -- including the expiration of the Bush tax cuts, the sequester, and other measures -- intentionally, and members have insisted for months that it would force both parties to agree to a less austere, bipartisan deficit reduction plan.
But by retracting the Social Security ask, Republicans bought themselves a few more hours to cut a deal.
"I was really gratified to hear the Republicans have taken their demand for Social Security benefit cuts off the table," Reid said. "The truth is they should never have been on the table to begin with."
If the negotiations fall apart overnight, Reid will introduce a measure on Monday to lock in Bush tax rates on income up to $250,000 per family, and extend emergency unemployment benefits. Republicans would then have to choose whether or not to filibuster that fallback plan. However Sen. John Cornyn (R-TX) -- a member of GOP leadership -- told reporters Sunday night that the GOP's decision would depend on whether or not Reid allowed votes on Republican amendments.