The House of Representatives passed the legislation by a unanimous voice vote.
The bill would have to clear the US Senate and be signed by President Donald Trump in order to become law. But it highlights the outrage in Congress towards the Palestinian Authority's continued use of payments to convicted attackers' relatives, and to the attackers themselves while they are in prison.
Israeli Prime Minister Benjamin Netanyahu's government has called for an end to the payments, which total several million dollars annually.
Republican and Democratic US lawmakers alike have warned that the payments incentivize violence and serve as a sticking point in the Middle East peace process.
"The Palestinian Authority should be forced to choose between its despicable practice of paying terrorists' salaries and receiving foreign aid funded by the American taxpayer," House Speaker Paul Ryan said in a statement after the vote.
The Taylor Force Act is named after a US military veteran and graduate student, age 28, who was killed in a 2016 attack while he was visiting Israel. The attacker, a Palestinian, was killed by police.
House Foreign Affairs Committee chairman Ed Royce called the Palestinian policy a "perverse pay-to-slay system."
"The Palestinian Authority gives salaries to Palestinians who attack innocent people like Taylor. If the attacker dies, their family is compensated," he said.
US Secretary of State Rex Tillerson said in June that the Palestinians were preparing to end the payments, but they remain in place.
The House vote came at a crucial juncture. Trump told Arab leaders on Tuesday that he will likely order a move of the US embassy in Israel to Jerusalem from Tel Aviv.
The announcement could come as early as Wednesday, when Trump is scheduled to deliver a speech on the issue.
Such a move could trigger widespread protests and unrest, and imperil the president's efforts at crafting a viable Middle East peace plan.
According to the State Department, US aid to the West Bank and Gaza is set for about $251 million in 2018.
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