Republicans make demands on payroll tax cuts

November 29, 2011 11:19 pm

Republicans make demands on payroll tax cuts

By James Politi in Washington

Republicans in the Senate are demanding new spending cuts in exchange for the extension of payroll tax reductions sought by the Obama administration and other Democrats to prop up the US economy.

The move by Republicans represents their opening bid in delicate negotiations that need to be resolved with a deal by mid-December in order to prevent a $110bn hit to the pockets of US consumers in 2012 that could damage the economic recovery.

It offers hope that lawmakers might still find common ground on at least one relatively large portion of the administration’s economic agenda after the vicious battles and deep rifts on fiscal policy that have defined American politics this year.

“In all likelihood we will agree to continue the current payroll tax relief for another year,” said Mitch McConnell, the Republican leader in the Senate.

Payroll taxes are levied on all American workers and employers to fund the Social Security retirement scheme. Last year, Congress agreed to cut the employee contribution from 6.2 to 4.2 per cent in 2011. The White House and Democrats are proposing to extend that level of tax relief in 2012 as well as lowering the tax further to 3.1 per cent for workers and also adding some payroll tax cuts for businesses. Combined, these measures would provide $265bn in fiscal stimulus for the US economy next year.

“This is the medicine that we can use in the near term to help strengthen the recovery and to help to provide insurance against shocks that might be coming,” Alan Krueger, chairman of the White House Council of Economic Advisers, said on Tuesday, ahead of a trip to the battleground state of Pennsylvania on Wednesday by President Barack Obama to push for enactment of the bill. “We’re seeing the economy heal; it’s just not healing fast enough,” Mr Krueger said.

Mr McConnell’s remarks suggest that Republicans are only open to passing one portion of the stimulus – simply extending current law – that would cost $110bn. But they will ease concerns that political gridlock could hamper passage of any of the measures, which would result in a potentially damaging fiscal contraction next year. “My sense is that it gets done, it’s just a matter of how and when,” said one Democratic aide in the Senate.

One Republican aide in the upper chamber said the details of the proposal to offset the cost of the economic stimulus would soon be forthcoming, and another assured that it would amount to a series of new spending cuts. These could be chosen from a menu of cuts that were discussed but not adopted during several rounds of deficit reduction negotiations that took place over the course of this year. Any deal would also need to be agreed by Republicans in the House of Representatives, who have said in the past that they are willing to work with the White House on payroll taxes, but have yet to lay out their conditions.

The payroll tax cut extension is the most economically significant issue that needs to be resolved in the coming weeks by Congress but the fate of emergency unemployment benefits, Medicare reimbursements for physicians, and other expiring tax breaks for businesses are also still in limbo.