Payroll tax cut: why Republicans might back Obama's plan (VIDEO)

President Obama has hit the road to lobby for his plan to extend and expand this year's payroll tax cut 'holiday.' Though concerns remain, Republicans worry that Obama is gaining traction.

In a deeply divided Congress already fixated on the 2012 elections, common ground doesn’t come easy. But the White House bid to extend and expand the payroll tax cut is emerging as an exception to this pattern of gridlock.

With President Obama fully engaged in selling his $250 billion payroll tax plan in campaign stops across the country, GOP congressional leaders worry that he is beginning to get traction with voters.

In closed caucus meetings this week, House Speaker John Boehner (R) of Ohio and Senate Republican leader Mitch McConnell of Kentucky cautioned conservatives that bucking what appears to be a tax cut may not be a battle worth fighting for Republicans.

But concerns remain on both the left and right. The cuts will be offset by a proposed surtax on the wealthy, meaning the plan is not a true tax cut, conservatives say. Meanwhile, liberals see the president's plan – which specifically targets the Social Security payroll tax – as one that could undermine the federal safety net in the long run. 

Still, Mr. Obama sees the situation tilting in his favor.

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“We’re starting to see just a hint of a response out of Congress,” Mr. Obama said at a fundraiser in New York on Wednesday. “Over the last couple of days, Mr. Boehner and Mr. McConnell have both 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.” 

The existing payroll tax cut gives employees and the self-employed a 2 percent reduction in their Social Security payroll taxes. Passed in December 2010 and set to expire on Dec. 31, this payroll tax “holiday” was intended to be temporary. Employers and employees typically pay 6.2 percent of covered earnings up to an annual limit.

But with the economy in a deep slump, Democrats say it’s no time to raise taxes on struggling families. They propose extending and expanding the employee tax break to 3 percent and creating a comparable tax break for employers, to be paid for by an open-ended 3.25 percent surtax on incomes over $1 million.

On Wednesday, Senate Republicans introduced their own plan that simply extends the existing payroll-tax cut for employees, to be paid for by a three-year freeze in government salaries and by shrinking the federal workforce by 10 percent. 

In a nod to the effectiveness of White House claims that Republicans are favoring the rich over struggling American families, the Senate GOP plan also proposes requiring people with incomes over $1 million to pay more for Medicare.

But to many conservatives, the president’s proposed new payroll tax holiday is not a net tax cut, because it requires the US Treasury to make up for the shortfall in payroll tax revenue to the Social Security Trust funds by transferring general funds there. Those general funds would have to be supplied by borrowing or, in the president's plan, tax hikes on the rich.

“It’s not a tax cut, and it threatens the integrity of Social Security,” says Sen. Jeff Sessions of Alabama, the top Republican on the Senate Budget Committee. 

He notes that, by the Democrats' own figures, it will take 10 years for the surtax on the wealthy to recoup lost revenues from Obama's one-year extension and expansion of the payroll tax holiday. That means borrowing to cover the shortfall in the meantime. 

“We’re borrowing all this money to finance an outlay to many people, including me, who have fine jobs, at a time when we’re having a hard time funding food stamps and other programs,” Senator Sessions says.

“The White House says, 'Don’t worry,' and that in 10 years we’ll collect enough money from rich people to pay for it, but it’s not good government, and we’re just digging the hole deeper,” he adds.

Some voices on the left, too, are concerned. The strength of Social Security is that it has its own funding stream – the payroll tax intended to make it immune to temporary political pressures. By meddling with that tax, Obama and Congress could be threatening Social Security’s long-term solvency, some Democrats say.

"Americans pay for one thing with our payroll tax – one – Social Security," said freshman Sen. Joseph Manchin (D) of West Virginia, in a floor speech on Thursday. "By 2037 if we don't do anything, benefits for everyone will have to be cut by 22 percent. And yet we're digging a deeper hole by destabilizing its funding with this recommendation. All in return for what? A temporary measure that has already cost nearly $120 billion and has, at best, created few, if any jobs."

Some groups on the left, typically aligned with Democrats on defending Social Security, have similar concerns.

“Everyone agrees it’s important to have more stimulus in the economy and the continuation of the payroll tax cut on employees will do it, but at a cost,” says Eric Kingston, codirector of Social Security Works, a coalition of progressive groups committed to preserving Social Security. “But the payroll tax holiday for employers is a very bad idea, because you don’t get a whole lot of stimulus from it.”

The coalition is divided on whether to support the plan proposed by the White House and Senate Democrats. “It’s a stimulus, and it’s important to the economy,” he adds. “But on the other hand, it’s the poison pill that could undermine the solvency of Social Security, if it becomes a habit.”

True, Social Security trust funds are “to be made whole by transfers from general revenue, but it’s concerning,” he says.

Meanwhile, some House conservatives are pondering whether to mount strong opposition to any GOP leadership plan to extend payroll tax breaks.

"It's clear that the Speaker and our leaders want to get this done, but the challenge from the rank-and-file is how do we get this done," says freshman Rep. James Lankford (R) of Oklahoma.  "Raising taxes for one group to lower them for another is the wrong way to do tax reform."