Payroll tax cut: proposals galore but consensus eludes

Congressional lawmakers in both parties offer assurances that the break Americans now enjoy on the payroll tax will be extended before it expires Dec. 31. But getting to 'done' is proving to be another tough row to hoe.

The Obama White House, in its own version of the New Year’s Eve countdown in Times Square, has added a banner to its website – a clock ticking down the seconds to when taxes on the middle class will rise “if Congress doesn’t act.”

That tax hit is the 2 percent payroll tax cut now set to expire at midnight, Dec. 31. If Congress fails to at least extend that tax cut, the Social Security tax rate for employees jumps back to 6.2 percent, up from 4.2 percent. If that happens, the average American taxpayer stands to lose about $1,000 in 2012. 

Leaders on both sides of the political aisle in Congress offer assurances that by year’s end the tax break will be extended. As lawmakers head into an election year, the stakes are simply too high to kick that can down the road. But GOP leaders, especially, are running up against strong opposition from the rank-and-file on anything that looks like caving on pledges to reduce deficits, dramatically cut spending, and reject all tax increases (which are an issue in this case because Democrats propose to pay for extending the payroll tax by a tax hike on millionaires.

In a stunning Senate vote last week, Republican leader Mitch McConnell of Kentucky lost more than half of his caucus over a $120 billion GOP proposal to pay for extending the payroll tax cuts by cutting the federal workforce and requiring people with higher incomes to pay more for Medicare.

On the House side, GOP leaders are expected to unveil a new proposal for extending the payroll tax cut and other expiring measures at a closed caucus meeting on Thursday. House leaders want to extend both the payroll tax cut and unemployment insurance, as well as to block mandated cuts in reimbursement rates to physicians serving Medicare patients, the so-called doc fix that Congress has approved for each of the past eight years. All are set to expire on Dec. 31.

In a nod to conservatives, the House GOP package might also advance the $7 billion Keystone XL pipeline, linking Canadian oil to Texas refineries, a project the White House has delayed.

House GOP leaders will try again Thursday to rally their caucus to back a new plan. So far, it’s been a tough sell. Most Republicans oppose any move to pay for extending the payroll tax cuts by raising taxes on the highest-income taxpayers. Some GOP lawmakers even resist the notion of extending the payroll tax cut, on grounds that it undermines the long-term stability of Social Security and drives the nation deeper into debt.

Many conservative lawmakers emerged from a meeting with GOP leaders Dec. 2 critical of any plan that would make up for the costs of extending the payroll tax cut with general revenue dollars. The US government now borrows about 40 cents of every dollar it spends. Shifting Social Security costs onto general revenue digs deeper deficits, requires more borrowing, and makes it less likely that the Bush-era tax cuts can be extended after Dec. 31, 2012, when they are set to expire, they say.

“I’m honestly conflicted,” says Rep. Trent Franks (R) of Arizona. “I’ve never voted for a tax increase in my life, and certainly don’t intend to do so now. The Bush tax cuts will expire next year, and I’m hoping for some type of agreement to prevent that.”

There are some signs of bipartisan initiatives to break the gridlock.

In a surprise move, Sens. Claire McCaskill (D) of Missouri and Susan Collins (R) of Maine on Tuesday unveiled a bipartisan proposal to extend the Social Security payroll tax break for employees as part of a larger infrastructure and jobs package.

The two centrists propose paying for the plan by adding a 2 percent tax to incomes over $1 million and by ending some oil industry tax breaks. In a nod to GOP objections, Senator Collins says the plan would exempt small businesses – the “job creators” that GOP lawmakers are wary of taxing at higher rates.

In a briefing Tuesday, Collins said people tell her that “they’re frustrated that Washington cannot set aside partisan bickering long enough to agree on a realistic path forward to spur job creation and to boost our economy.”

Meanwhile, Senate Democrats are preparing to vote anew on the payroll tax cut extension – this time on a proposal by Sen. Bob Casey (D) of Pennsylvania. His plan is a scaled-back version of the Democrats' previous bill, which went down to defeat. It eliminates a proposed new tax break for employers, reducing the overall cost of the Democratic proposal from $265 billion to $185 billion. It extends for one year employees' "holiday" from the payroll tax and expands it by reducing the payroll tax obligation to 3.1 percent, down from a current 4.2 percent. If Congress fails to act, the tax jumps back to 6.2 percent.

The Casey proposal also would have a smaller surtax on incomes over $1 million. Originally, Democrats envisioned raising that tax rate by 3.24 percentage points; the Casey proposal calls for a hike of 1.9 percentage points. His plan also specifies that the surtax will expire after 10 years.

“As the clock continues to tick down, it is imperative that we come together now on a middle income tax cut,” he said, in a statement Tuesday.