Bloomberg News

Boehner Optimistic on Payroll Tax Cuts as Partisan Plans Fail

December 08, 2011

Dec. 2 (Bloomberg) -- The first attempts to prevent a payroll tax cut from expiring Dec. 31 fell short in the U.S. Senate, even as House Speaker John Boehner expressed confidence that Congress would extend the tax break and unemployment benefits.

“There is enough common ground between where the White House and Democrats are and where Republicans are for us to move this legislation and to do so quickly,” Boehner told reporters yesterday.

Many lawmakers from both parties agree that Congress should extend the 2 percentage point cut in the payroll tax and expanded unemployment insurance into 2012 to prevent workers from getting smaller paychecks. They disagree on how to cover the cost. The payroll tax cut extension would prevent the government from collecting $119.6 billion.

The Senate votes yesterday demonstrated partisan divisions, though even most Republicans opposed a plan proposed by their leaders.

Senators rejected a Democratic proposal to impose a 3.25 percent surtax on income over $1 million, expand the cut to 3.1 percentage points and extend it, in part, to the employer portion of the payroll tax. The counter-proposal by Republican leaders would have recouped the forgone revenue by freezing the pay of federal civilian workers and shrinking the federal workforce by 10 percent through attrition.

The vote on the Democratic proposal was 51-49, nine shy of the 60 needed to advance it. The Republican version got just 20 votes, with no support from Democrats.

Democratic Defectors

Democrats Joe Manchin of West Virginia and Jon Tester of Montana and independent Bernard Sanders of Vermont, who usually votes with the Democrats, opposed the Democratic plan. Senator Susan Collins of Maine was the lone Republican to vote for the Democratic plan.

More than half of Senate Republicans opposed the plan proposed by Minority Leader Mitch McConnell of Kentucky. Opponents included Senator John Thune of South Dakota, who had argued for the proposal on the floor moments before the vote.

“We were putting up a proposal that a majority of our conference wanted us to put up, so we did that, and I helped to craft it,” said Senator Jon Kyl of Arizona, the second-ranking Republican. “But I didn’t want to support it because -- as a matter of policy -- I think we are making a mistake taking money out of the Social Security trust fund for an extension of this so-called holiday. I don’t think that it achieves the purpose of creating jobs.”

Money Transfer

The legislation would transfer money from general Treasury funds to Social Security to cover the cost of the payroll tax cut.

The rejection of those proposals clears the way for further negotiations, and top lawmakers and Obama administration officials said yesterday that they saw possibilities for an agreement.

House Minority Leader Nancy Pelosi told reporters in Washington that Democrats would consider “reasonable” spending cuts to pay for extending the payroll tax reduction.

Jay Carney, the White House spokesman, said, “We will move forward and try to find a way to reach an agreement.” President Barack Obama, who has been urging Congress to extend and expand the payroll tax cut, may talk to lawmakers personally “in the coming days and weeks,” the spokesman said.

In a statement issued after the vote, Obama called Republican objections unacceptable.

Taxing Middle Class

“It makes absolutely no sense to raise taxes on the middle class at a time when so many are still trying to get back on their feet,” he said.

An administration official familiar with the discussions said talks would begin in earnest over the weekend.

Senator Dan Coats, an Indiana Republican, said the chamber will “eventually pass” an extension.

“Both sides are committed to passing this, so in the end there will be some different mix of cost offsets agreed to,” he said.

Figuring out the details won’t be easy, said Senator Mike Crapo, an Idaho Republican.

“I’m not sure,” he said yesterday when asked about the prospects for compromise. “I don’t think that a huge tax increase will fly.”

Seeking Big Cut

Senator Charles Schumer, a New York Democrat, told reporters that his party will continue to press the tax increase and as large a payroll tax cut as possible.

“We have a lot of leverage in the negotiations that are coming ahead,” he said. “And this isn’t the only tax issue where Republicans are on the defensive. On the millionaire’s tax, the Republican wall against taxing incomes over a million dollars is beginning to crack.”

He said he would be willing to work with Senator Collins, who has suggested exempting income earned from active businesses from the surtax.

The extended jobless benefits and payroll tax cut for workers are among the items that Congress must consider by year’s end. Lawmakers also are discussing how to avoid a 27 percent cut in physician reimbursements by Medicare, scheduled to begin Jan. 1. It would cost about $21 billion over a decade to keep payments to doctors at the current level.

Miscellaneous Breaks

Miscellaneous tax breaks, including the research and development tax credit, also expire. That group of provisions has a history of being extended retroactively.

At a minimum, Obama wants to see the current 2 percentage point payroll tax cut for employees extended for 2012. Senate Democrats are seeking to reduce the payroll levy to 3.1 percent for workers. They also would lower the employer rate to 3.1 percent from 6.2 percent on the first $5 million in payroll and eliminate the levy for each company’s first $50 million in wage growth.

Boehner said yesterday that extending the payroll tax cut would help the economy because it keeps money in people’s pockets. The tax benefit must be financed by spending cuts because “any drop in revenue resulting from a temporary reduction of the payroll tax that is not paid for” hurts Social Security and would “accelerate the program’s looming bankruptcy,” Boehner said.

House Republicans haven’t said yet how they plan to offset the costs of the payroll tax cut and unemployment insurance.

--With assistance from Steven Sloan, Roger Runningen, Alex Wayne, Kate Andersen Brower and Kathleen Hunter in Washington. Editors: Jim Rubin, Jodi Schneider.

To contact the reporters on this story: Richard Rubin in Washington at rrubin12@bloomberg.net; James Rowley in Washington at jarowley@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net


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