Bloomberg News

Senate Democrats Offer Smaller Surcharge in Payroll Tax Plan

December 09, 2011

(Updates with Romney’s support of one-year extension in last three paragraphs.)

Dec. 6 (Bloomberg) -- Democrats in the U.S. Senate will seek another vote on a payroll tax cut for workers this week in an attempt to pressure more Republicans to support an extension into 2012.

Legislation proposed by Senate Democrats yesterday would cut the payroll tax paid by employees to 3.1 percent next year from the current 4.2 percent. The $185 billion cost would be offset by a new 1.9 percent surtax on annual incomes exceeding $1 million and by raising the fees charged to lenders by government-owned mortgage giants Fannie Mae and Freddie Mac. The proposal was sponsored by Senator Robert Casey, a Pennsylvania Democrat who is facing a tough race for re-election next year.

The measure nods at some of the concerns Republicans have raised about how a payroll tax cut extension would be offset. The plan reduced the millionaire surtax rate from 3.25 percent to 1.9 percent and incorporated ideas that were raised during negotiations of the bipartisan congressional supercommittee. The proposal also trims the package’s cost by eliminating a proposed payroll tax cut for employers.

“It is imperative that we come together,” Casey said in a statement. “The legislation is fully paid for and includes measures that have received bipartisan support in the past.”

Democrats control 53 seats in the Senate and would need the support of at least a few Republicans to secure the 60 votes that will be necessary for passage. Senator Susan Collins of Maine was the only Republican to support an earlier Democratic payroll tax cut proposal last week. Three members of the Democratic caucus opposed the measure, which didn’t clear the 60-vote threshold.

Dec. 31 Deadline

Unless Congress acts, the reduction to 4.2 percent in the employee portion of the Social Security payroll tax, from 6.2 percent, will expire on Dec. 31. Mark Zandi, chief economist at Moody’s Analytics, has said that failure to extend the payroll tax cut into 2012 could shave half of one percentage point from U.S. gross domestic product next year.

“Raising taxes by $1,000 next month will have an immediate negative impact on the economy,” Senate Majority Leader Harry Reid, a Nevada Democrat, said on the Senate floor yesterday. “We all know Congress can’t afford to play chicken with this economy.”

President Barack Obama said Republicans would be “leaving 1.3 million Americans out in the cold” next month if they allow the payroll tax cut to lapse.

‘Spur Hiring’

“It’s important insurance for them against the unexpected,” Obama told reporters yesterday. “It will spur spending. It will spur hiring and it’s the right thing to do.”

Republican leaders said it was unlikely that they could support the proposal. Don Stewart, a spokesman for Senate Minority Leader Mitch McConnell of Kentucky, said, “The only thing bipartisan about adding a tax hike on job creators is the opposition.”

Senator Orrin Hatch of Utah, the top Republican on the Senate Finance Committee, criticized the surtax proposal in an e-mail, calling it a “permanent tax hike on small businesses to pay for temporary one-year tax policy.”

In response to criticism that Democrats were using a permanent tax increase for high earners to offset a temporary payroll tax cut, the legislation proposed yesterday would end the surtax in 10 years.

It also proposes means-testing eligibility for unemployment compensation and food stamps, a provision Republicans included in their plan. Democrats wouldn’t require high earners to pay higher Medicare premiums, as Republicans had earlier proposed.

Guarantee Fees

The plan would require Fannie Mae and Freddie Mac to raise their guarantee fees by at least 12.5 basis points while allowing the director of the Federal Housing Finance Agency to determine the details. The higher fees would raise $38.1 billion, according to Casey’s summary.

House Republicans plan to propose legislation in coming days that would extend the 4.2 percent payroll tax rate for one year for employees. House lawmakers will seek to avoid cuts to physician reimbursements by Medicare and address expanded unemployment benefits that are set to expire at the end of the year. The Republican plan also is expected to include language expediting construction of the Keystone XL pipeline from Canada as well as an Environmental Protection Agency proposal to limit emissions for industrial boilers.

On the Republican presidential campaign trail, former Massachusetts Governor Mitt Romney said yesterday on a radio talk show that he supported a one-year extension, marking a shift from October when he appeared to reject the idea.

“I would like to see the payroll tax cut extended just because I know that working families are really feeling the pinch right now,” Romney said yesterday on Michael Medved’s radio show, according to the New York Times.

At an Oct. 10 debate hosted by Bloomberg LP and the Washington Post in Hanover, New Hampshire, Romney said he didn’t want “temporary little Band-Aids” for the tax code. “I want to fundamentally restructure America’s foundation economically.”

--With assistance from Laura Litvan, Margaret Talev, Roger Runningen and Hans Nichols in Washington. Editors: Jodi Schneider, Robin Meszoly

To contact the reporter on this story: Steven Sloan in Washington at ssloan7@bloomberg.net

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


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