Reid Said to Eliminate U.S. Payroll Tax Cut for Companies

By Steven Sloan - Dec 6, 2011 4:42 AM GMT+0700

Democrats in the U.S. Senate are abandoning a plan to lower the payroll tax for employers and focusing instead on continuing and expanding the current tax cut for workers.

Legislation proposed today by Senator Robert Casey proposes cutting the payroll tax paid by employees to 3.1 percent for 2012 from the current 4.2 percent, according to a summary circulated by the Pennsylvania Democrat. Eliminating the provision to reduce the payroll tax for employers will reduce the package’s cost to $185 billion over 10 years.

Democrats are proposing to offset that cost by raising the fees charged to lenders by government-owned mortgage giants Fannie Mae and Freddie Mac. (FMCC) The legislation would also impose a 1.9 percent surtax on income exceeding $1 million, lower than a 3.25 percent surtax Democrats had previously proposed.

“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.”

The proposal is being offered after the Senate blocked competing measures sponsored by Democrats and Republicans last week. Senate Majority Leader Harry Reid is using the revisions announced today to build pressure on at least a few Republicans to support the bill. Democrats control 53 seats in the Senate and will likely need to secure 60 votes to avoid a filibuster and win passage of the legislation. Just one Republican senator -- Susan Collins of Maine -- supported last week’s Democratic bill.

Negative Impact

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

Today’s proposal from Democrats will end the millionaire surtax after 10 years instead of making it permanent, as they previously had sought. It will propose means testing eligibility for unemployment compensation and food stamps, a provision Republicans included in their plan. Democrats won’t require high earners to pay higher Medicare premiums, as Republicans had earlier proposed.

The plan would require Fannie Mae (FNMA) 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 decide the details. The higher fees would raise $38.1 billion, according to Casey’s summary.

‘Out in the Cold’

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.

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

Unless Congress acts, the current payroll tax cut -- which lowered the employee portion of the Social Security payroll tax from 6.2 percent to 4.2 percent for 2011 -- will expire on Dec. 31. Mark Zandi, chief economist at Moody’s Analytics, has said failure to extend the payroll tax cut into 2012 could cause the U.S. gross domestic product to decline by at least one-half of one percentage point during 2012.

With the millionaire surtax, the Democratic measure will encounter resistance from Republicans who have said such a provision will hurt small-business owners who record business income on their individual tax returns. Don Stewart, a spokesman for Senate Minority Leader Mitch McConnell, said Republicans haven’t seen the details of the proposal.

Not Bipartisan

“But I do know that the only thing bipartisan about adding a tax hike on job creators is the opposition,” he said in an e- mailed statement.

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.”

House Republicans plan to propose legislation in coming days that would extend the existing 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 unemployment benefits that are slated to expire at the end of the year.

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