Bloomberg News

Payroll Tax Politics Pose Risk for House and Senate Republicans

December 31, 2011

(For news about the election, see ELECT <GO>.)

Dec. 21 (Bloomberg) -- A rare showdown between House and Senate Republicans over a temporary extension of the payroll tax cut poses a political threat to the party’s members on both sides of the Capitol heading into the 2012 elections.

It feeds into President Barack Obama’s campaign narrative that House Republicans’ obstructionism has resulted in a do- nothing Congress at a time when middle-class Americans need help in a struggling economy. At the same time, it fuels Tea Party opposition to Senate Republicans who teamed with Democrats to pass a two-month extension instead of a longer-term fix.

“The Republican leadership knows that this is potentially a very serious political liability,” said Ron Bonjean, a Republican strategist and former director of communications for former House Speaker Dennis Hastert. “Democrats can use it as a weapon against them in the coming election year,” said Bonjean, who predicted House Republicans will ultimately agree to a deal.

Senators such as Richard Lugar of Indiana are already coming under fire from local Tea Party activists like Monica Boyer, who said Lugar’s support for a temporary extension is “just kicking the can down the road.”

“There’s just so much that’s building up and so much anger on the ground,” said Boyer. “He doesn’t listen to us” and “it is 100 percent why we are going after him and why we’ve had enough,” said Boyer, co-founder of Kosciusko County Silent No More, her local Tea Party Group.

Harm to Image

While the House Republicans’ position may play well with the Tea Party voting base, it hurts their image with the broader public, said Jennifer Duffy, a Senate analyst at the nonpartisan Cook Political Report.

“I don’t think Senate Republicans look all that bad here, but I think House Republicans sure do,” said Duffy. “And I wouldn’t be surprised to see the Senate guys just sort of throw them over the side.”

The Senate voted on Dec. 17 by an 89-10 margin for the temporary tax-cut legislation, with the support of 39 Republicans, among them Minority Leader Mitch McConnell of Kentucky. Yesterday the Republican-controlled House rejected the bipartisan Senate plan, which also extended unemployment benefits.

Obama said yesterday that the compromise reached in the Senate is “the only viable way to prevent a tax hike” on Jan. 1 while lawmakers negotiate a yearlong extension. He accused House Republicans of trying “to wring concessions from Democrats on issues that have nothing to do with the payroll tax cut” and said, “this is not a game.”

TransCanada Pipeline

The Senate’s $33 billion tax-cut extension plan would require Obama to decide within 60 days on TransCanada Corp.’s Keystone XL oil pipeline and would prevent physicians from getting hit with a 27.4 percent cut in Medicare reimbursements that could hurt health-care access for the elderly and disabled.

Duffy cited these provisions as a victory for Senate Republicans, along with the fact that the measure would forestall a tax increase on the American people.

Massachusetts Senator Scott Brown, a Republican supporter of the temporary bill who faces a difficult re-election fight against Democratic challenger Elizabeth Warren, decried the decision by House Republicans to scuttle the short-term measure.

“Of all the ugly partisanship that has disappointed the nation this year, this latest episode will hurt hard-working Americans directly and immediately,” he said in a statement.

Doctors’ Fees

Senator Orrin Hatch, a Utah Republican who also voted in favor of the two-month plan, said in a statement that while he was “concerned” about the temporary measure, he supported it because of the pipeline and the provision for doctors’ fees.

Todd Young, an Indiana Republican congressman, said his home-state senator, Lugar, and others like Hatch and Brown were wrong to support a stopgap bill.

“They’re home warming themselves around the Christmas fire,” he said. “They need to get back to work.”

Young said he isn’t “staking my position on this based on the best political thing” and the political fallout remains to be seen.

Even so, economists are forecasting that failure to extend the payroll tax cut and long-term benefits for unemployed workers into 2012 may slow the recovery. Growth could be reduced next year by as much as 1 percentage point, economist Ward McCarthy said Dec. 19 on Bloomberg Radio’s “Under Surveillance” with Tom Keene.

Growth in 2012

Michael Feroli, JPMorgan Chase & Co.’s New York-based chief U.S. economist, assumes 0.5 percent growth in the first quarter and 1.5 percent in the second if the payroll tax cut and unemployment benefits aren’t extended. If they are extended for the year, he expects growth of 2.5 percent in the first half of the year, he said in a Dec. 16 note to clients.

Lugar’s and Hatch’s votes for the temporary measure won’t be a political winner, said Nathan Gonzales, political editor of the Rothenberg Political Report in Washington. The two senators are among the most vulnerable to primary challenges, even after Representative Jason Chaffetz of Utah, Hatch’s best-positioned competitor, decided against a run, he said.

Their payroll-tax stance “gives their challengers a more current vote to point to and say ‘this is why we need to make a change,’” said Gonzales. “It’s something specific and current they can point to against the incumbent.”

Both the Tea Party Express, a national group, and the conservative FreedomWorks have endorsed Lugar’s Republican challenger, state treasurer Richard Mourdock, who lacks the incumbent’s fundraising base and name recognition. Democrats are defending 23 seats in the Senate, including six open slots, while Republicans are defending 10 this cycle. Republicans need to gain four seats to control the Senate.

Risk to Senate Hopefuls

Duffy also sees a risk to some House Republicans who may want to run for the Senate, such as Jeff Flake of Arizona and Connie Mack of Florida. While Flake and six of his House colleagues rejected his party’s position against the Senate measure, “they just get tarred” regardless, said Duffy.

House Democrats hastened to turn the standoff into a fundraising appeal. Minority Leader Nancy Pelosi of California sent a letter to supporters saying middle-class Americans could see their taxes increase by $1,000 on Jan. 1 unless Republicans “back down from their extreme stance.”

House Republicans remained emphatic that the Senate will have to be the first to blink.

“I could just sit here and go, ‘This is the best deal you’re going to get,’ hold my hands and wait,” said Representative Steve King of Iowa.

--With assistance from Derek Wallbank and Laura Litvan in Washington. Editors: Robin Meszoly, Laurie Asseo

To contact the reporters on this story: Heidi Przybyla in Washington at hprzybyla@bloomberg.net;

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


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