WASHINGTON—Congressional leaders struck a tax-policy deal late Monday, capping a long weekend of negotiations with an agreement that will extend lapsed and expiring tax breaks but won’t be as expansive as many lawmakers had hoped.

The extended breaks included incentives for biodiesel producers, which expired at the end of 2017 but would last through 2022 if enacted. A more generous medical-expense deduction for individuals that lapsed at the end of 2018 would run through 2020. A tax credit for short-line railroad maintenance…

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