Payroll Tax Cut Talks Shift to Squabble Over How To Cover Proposal’s Cost

By Richard Rubin and Steven Sloan - Nov 30, 2011 8:36 PM GMT+0700

Top lawmakers from both parties are proposing to offset the cost of extending a U.S. payroll tax cut, establishing markers for negotiations over how to prevent the break from expiring Dec. 31.

Senate Minority Leader Mitch McConnell of Kentucky hasn’t said how Republicans plan to cover the forgone revenue from extending the 2 percentage point reduction in employees’ portion of the Social Security tax. Arizona Senator Jon Kyl, the chamber’s second-ranking Republican, said details would be available by today.

Democrats have proposed extending and expanding the tax break. The Democrats’ $265 billion proposal would be offset by a 3.25 percent surtax on annual income exceeding $1 million, and a test vote is planned for this week on the proposal.

“We’re going to enter into a phase now of back-and-forth gamesmanship over how to pay for the payroll tax,” said Brian Gardner, the senior vice president for Washington research at KBW Inc. “Even those members who question its value come to the conclusion that voting against it is a political loser. It’s really a question of how you pay for it.”

That question will demonstrate the size of the divide between the parties on fiscal policy that helped lead to the impasse of Congress’s deficit-reduction supercommittee this month.

“We think it ought to be paid for and not by raising taxes on the people we’re depending upon to create jobs,” Senator John Cornyn, a Texas Republican, said yesterday.

Affected by Surtax

Alan Krueger, chairman of President Barack Obama’s Council of Economic Advisers, disputed that point, and said “very few” employers would be affected by the Democrats’ proposed income surtax. Obama is scheduled to travel to Pennsylvania today to make the case for the payroll tax cut.

“The president’s proposal puts the burden on those who can most afford it,” Valerie Jarrett, a senior adviser to Obama, said today on MSNBC’s “Morning Joe” program. She suggested that the White House is open to other ways to pay for the $265 billion tax cut but wouldn’t be specific.

“The president is interested in making sure that whatever we do is fiscally responsible,” she said.

Republicans distributed an analysis from the nonpartisan Joint Committee on Taxation showing that 34 percent of business income that flows through to individual returns would be subject to the surtax. The analysis doesn’t estimate the size of those businesses or how business owners would respond to the tax increase in their personal spending or business decisions.

‘Critical Time’

“This is a critical time for the economy,” Krueger said at a White House briefing yesterday. “What’s clear is extending the payroll tax cut will strengthen the recovery.”

Letting the tax cut lapse would mean a $1,000 tax increase for a family earning $50,000 a year. Crimping consumer spending at a time when the economy faces “weak aggregate demand” would be a drag on growth, Krueger said.

The Democrats’ plan would expand the two-percentage-point reduction to 3.1 percentage points for 2012. It would cut by 3.1 percentage points the tax on employers’ first $5 million in wages and remove employers’ tax on certain wage growth. The proposal would move money from the general fund to the Social Security trust fund, which is supported by the payroll tax.

McConnell Proposal

McConnell’s proposal to offset the cost of extending the payroll tax cut runs counter to arguments by some Republicans that tax-cut extensions shouldn’t be paired with other measures to prevent them from increasing the federal budget deficit.

“With this $15 trillion debt we now have, bigger than our economy, we need to be paying for a measure like this that’s temporary, and I think in the end we will pay for it,” McConnell said.

Potential offsets could include items considered by the supercommittee, though such options would need to be considered outside a comprehensive deficit-reduction package, said Representative Dave Camp, chairman of the House Ways and Means Committee.

“We’re going to have to look at everything with a new approach because we’re not in the supercommittee now,” Camp, a Michigan Republican who served on the panel, said in an interview yesterday.

McConnell’s plan to offset the cost of a payroll tax cut likely won’t have unanimous support from his members, who are split on whether to extend the tax cut and whether to offset it. That’s a change for a party that is usually united on tax cuts.

Follow Precedent

Massachusetts Republican Senator Scott Brown said yesterday that Congress should follow its precedent in deciding not to offset the cost of the tax cut when it was enacted last year. Republican Senator Mike Enzi of Wyoming said he doesn’t think the payroll tax cut has created jobs.

Senator Olympia Snowe, a Maine Republican, said the focus on the payroll tax cut was obscuring more important issues such as overhauling the tax code.

“One-year policy isn’t going to be sufficient to do what’s necessary,” she said.

Krueger wouldn’t say whether the administration would accept an extension of the tax cut that isn’t matched with higher revenue or budget cuts elsewhere. He added that the White House is “open to economically sensible ways” to offset the proposal’s cost.

‘Continue Working’

Senate Majority Leader Harry Reid didn’t signal what Democrats will do if their first proposal, containing the high- earner surtax, fails. Democrats control 53 seats in the 100-seat Senate. Republicans can use procedural moves to require a 60- vote threshold.

“We are going to continue working until we get the payroll tax extended,” Reid, a Nevada Democrat, said yesterday.

House Republicans, who control that chamber, need to discuss their options, said Camp.

“We’re just starting to get together so I think we’re going to have a few days of really listening to our members,” he said. “There’s a lot of issues that are unresolved and this is a time to really take stock with our members and see where everybody is.”

To contact the reporters on this story: Richard Rubin in Washington at rrubin12@bloomberg.net; Steven Sloan in Washington at ssloan7@bloomberg.net

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