U.S. President Barack Obama says the federal government should not shut down because Congress cannot agree on a tax issue.

In Washington Thursday, the president pressed lawmakers to extend the payroll tax cut before they leave for their holiday break, saying otherwise 160 million working Americans will see their taxes increase on January 1.

Federal funding expires after Friday.  U.S. lawmakers are expressing optimism a deal can be reached before then, to avert a partial government shutdown.

Senate Majority Leader Harry Reid said lawmakers are working Thursday to resolve differences on a bill to keep the government running and a measure to extend the payroll tax cut.  Senate Republican leader Mitch McConnell said he was "confident and optimistic" both bills can be resolved.

On the Senate floor Thursday, Reid said that lawmakers have done enough "back and forth" and that now the sides are going to work to resolve some of the outstanding issues.

In the House of Representatives, Speaker John Boehner told reporters he is confident lawmakers will reach an agreement.

The stopgap funding for the federal government runs out Friday at midnight.  If Congress fails to pass new funding, non-essential government services would be forced to halt.