Dec. 1 (Bloomberg) -- Republicans in the U.S. Senate want to cover the cost of extending a payroll tax cut by freezing federal workers’ pay through 2015 and reducing the federal civilian workforce by 10 percent, putting them at odds with Democrats over how to pay for the $119.6 billion tax break.
The proposal counters efforts by President Barack Obama and Democrats to expand the payroll tax cut and pay for it by imposing a 3.25 percent surtax on income above $1 million. Procedural votes on the competing proposals could occur in the Senate as early as today, and lawmakers don’t expect either approach to advance because of continued differences between the parties.
“This is the same argument we’ve been having time after time, just in different contexts,” Representative John Yarmuth, a Kentucky Democrat, said in an interview yesterday.
A 2 percentage point reduction in the payroll tax for employees expires Dec. 31. Obama has been urging Congress to extend it and expand it. He told an audience in Scranton, Pennsylvania, yesterday the U.S. economy would suffer a “massive blow” if Congress lets it expire.
“I want to make sure that we do this responsibly,” he said. “So what I’ve said is to pay for this tax cut, we need to ask wealthy Americans to pay their fair share.”
At a New York City fundraiser later in the day, Obama sounded a more conciliatory note as he referred to recent remarks by House Speaker John Boehner of Ohio and Senate Minority Leader Mitch McConnell of Kentucky.
Obama said the Republican leaders “over the last couple of days” have indicated “that it probably does make sense not to have taxes go up for middle-class families, particularly since they’ve all taken an oath not to raise taxes.” Obama said “additional progress in the next couple of weeks” may be possible.
Many Republican lawmakers have signed a no-tax-increase pledge promoted by activist Grover Norquist.
Republicans have resisted the Democrats’ tax increases, and lawmakers said they weren’t sure what proposal could win enough support to become law. Representative Tom Cole, an Oklahoma Republican, said members of his party were still trying to reach a consensus among themselves.
“It’s going to come down to what type of spending cuts” Obama is “going to be willing to accept” because “I don’t think you are going to find any Republican appetite to increase taxes,” Cole said.
The Senate Republican proposal, introduced yesterday by Dean Heller of Nevada, would generate $222 billion in savings over the next decade by freezing federal pay through 2015 and reducing the civilian workforce by 10 percent. The bill would reduce federal budget deficits by about $111 billion.
The plan would also make the highest earners pay the full cost of their Medicare premiums and prevent them from getting unemployment compensation and food stamps.
“This bill will provide some relief to struggling workers who continue to need it but without raising taxes on job creators, which is what the Democrats’ proposal would do,” McConnell said in a statement.
Adam Jentleson, a spokesman for Senate Majority Leader Harry Reid, a Nevada Democrat, said the Republican offset wouldn’t win Senate passage.
“The Republican proposal cannot pass the Senate as it stands, but now that Republicans have reversed their position on this middle-class tax cut, we look forward to working with them to negotiate a consensus solution,” Jentleson said in a statement.
The Social Security portion of payroll taxes, which will be levied on the first $110,100 of income in 2012, is split between employees and employers. Each side typically pays 6.2 percent of wages.
Social Security Tax
For 2011, the Social Security payroll tax for employees was lowered to 4.2 percent. A worker earning $50,000 a year who is paid biweekly has been saving $38.46 in each paycheck.
At a minimum, Obama wants to see the current tax cut for employees extended for 2012. Senate Democrats are seeking to reduce the payroll levy to 3.1 percent for workers. They would also lower the employer rate to 3.1 percent on the first $5 million in payroll and eliminate the levy entirely for each company’s first $50 million in wage growth.
The Democrats’ $265 billion proposal would be offset by a permanent 3.25 percent surtax on annual income exceeding $1 million.
Under the Senate Republicans’ proposal, federal agencies would be allowed to hire one worker for every three who leave, until the agency’s workforce has been reduced by 10 percent.
The pay freeze would apply to all civilian employees of the executive branch, along with members of Congress and their staffs. The 10 percent workforce reduction doesn’t appear to apply to congressional staff, based on the text of the bill.
“This is an attempt to single out and scapegoat federal employees who had nothing to do with the economic problems the country’s facing while refusing to ask the very well-off in this country to share the responsibility,” said Representative Chris Van Hollen, a Maryland Democrat whose district includes many federal employees.
House Republicans will come up with their own proposal on extending the payroll tax, said Representative Tom Price, a Georgia Republican.
“The payroll tax won’t come by itself,” Price said, predicting that it would be rolled into a package extending a range of provisions set to expire Dec. 31. Price said his support, and the support of other like-minded Republicans, would hinge on “what the whole package is at the end.”
Democrats also want to continue expanded unemployment benefits that are due to expire at the end of this year. House Democratic Whip Steny Hoyer of Maryland said he believes Republicans haven’t decided whether to insist on offsetting the cost of those benefits with spending cuts.
Miscellaneous tax breaks and a provision to prevent a scheduled reimbursement cut to doctors under Medicare also expire Dec. 31.
The Democratic payroll tax bill is S. 1917.
--With assistance from Kathleen Hunter, James Rowley and Kate Andersen Brower in Scranton, Pennsylvania. Editors: Jodi Schneider, Jim Rubin.
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