Payroll Tax Cut Compromise Expected by End of Week

Republican and Democratic negotiators in Congress expect to vote on a bill to extend the payroll tax cut by the end of this week.

If an agreement is not reached by the end of the year, the payroll tax cut will expire and American workers will return to paying the full amount, 6.2 percent instead of 4.2 percent with the cut, taken out of their paychecks to pay for Social Security benefits. The impasse between the two sides is on how to pay for the tax cut.

President Obama has been repeatedly reminding his audiences that a year ago this month Congress extended the payroll tax cut without much controversy. That, however, was the 111th Congress. This Congress, the 112th, was put into power through the historic 2010 elections, which saw several incumbent Republicans ousted in the primaries and major defeats for Democrats in the general election.

The 112th Congress has Republicans in control of the House and a slim majority of Democrats controlling the Senate. The Tea Party-influenced elections that brought all 435 House members and one-third of the Senate into power sent a message that government is spending too much.

Whereas the 111th Congress sought to “jumpstart” the economy out of the recession through government spending and tax cuts, such as the payroll tax cut, the 112th Congress changed the focus of government action from profligacy to frugality.

House Republicans demanded spending cuts and refused to raise the debt ceiling without cuts equal to or more than the amount of the debt ceiling increase. By early summer, President Obama was rejecting his own budget and echoing this position.

While refusing to extend the payroll tax without paying for it is consistent with the new Tea Party-influenced Republican Party, there are dangers for the party if they do not pass an extension. Republicans generally favor tax cuts, so to oppose a tax cut now appears to be motivated by petty partisan opposition to Obama. Also, policies that give taxpayers money generally help the reelection efforts of members of Congress.

The House will vote Tuesday on an extension of the payroll tax cut that will include an extension of unemployment benefits and require Obama to issue a decision on the Keystone XL pipeline.

Obama had decided to delay a decision on the pipeline, which would deliver oil from Canada to refineries in Texas, until 2013. He said more time is needed to determine if the pipeline is safe for the environment. Republicans charge that he is delaying the decision until after the 2012 elections to avoid a controversy that would cause a split in his party between environmental and labor groups.

Obama said he would “oppose” a payroll tax cut extension that included the pipeline provision, but has not explicitly said he would veto it. Republicans are betting that he would not veto the bill.

“There are a significant number of Democrats, Senators and House members, who are going to support this package. This has bipartisan support,” Senate Minority Leader Mitch McConnell (R-Ky.) said on “Fox News Sunday.”

To pay for the tax cut, Republicans are proposing a freeze on federal worker pay and a reduction in the federal workforce (through attrition, not layoffs).

Democrats wanted to pay for the tax cut with a surtax on income above $1 million. Republicans balked at adding a permanent tax increase to pay for a temporary tax cut. They also argued that taxes should not be raised on “job creators” during a recession.

On the Senate floor Monday, House Majority Leader Harry Reid (D-Nev.) criticized Republican opposition to the surtax, saying, “Millionaire job creators are like unicorns. They are impossible to find and don't exist."

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