US Congress Passes Payroll Tax Extension

by Mike Godfrey, Tax-New.com, Washington

21 February 2012

As was expected, and just in time before the short Congressional recess, an extension of the United States payroll tax cuts and unemployment benefits, from the end of this month to the end of the year, passed through both the House of Representatives and Senate with varying degrees of bipartisan support.

The agreement to pass the extension, which has been lobbied for intensely by President Obama and the Democrat party, was made after Republican leaders decided that their best way forward was to support a plan that would not require the tax cuts to be completely offset by federal spending reductions, as had been their initial intention, so as to kick a difficult political problem up the road beyond the November elections.

At the end of December last year, after tough bargaining, a two-month extension to the end of February 2012 had been agreed for the 2% reduction in payroll tax to 4.2%, together with a similar extension for federal unemployment benefits and a delay in scheduled reductions to Medicare doctors’ payments.

While both parties could be seen, politically, to be generally in favour of a further extension, particularly as the American economy struggles out of recession, the difficulty of an agreement had revolved around a Republican search for federal spending reductions to offset its cost.

In the event, a compromise bill has left unfunded the USD93bn cost of extending the payroll tax cuts, while the more than USD50bn expended on extending unemployment benefits and delaying the Medicare reductions has been covered largely by an increase of 2.3% in federal employees’ pension contributions, for employees joining the federal service after December 31, 2012, with less than five years of civilian service, and by the reduction of certain health-care funds and provisions.

In the event, the Republican-led House of Representatives passed the bill by a 293-132 vote, and then shortly thereafter the Democrat-led Senate approved it by a 60-36 vote.

As could be expected Congressional Republicans have been left somewhat disgruntled. House Speaker John Boehner (R – Ohio) stated that “there are a number of positive aspects to this agreement, including preventing a tax increase on hardworking Americans, … (but) this is an economic relief bill – not a growth bill. The only reason the provisions at the core of this measure are even necessary is because the president’s economic policies have failed.”

“It is also unfortunate,” he added, “that this agreement is only partially offset because of Democrats’ refusal to consider common-sense, bipartisan spending cuts, many of which were drawn from the president’s own budget.”

In addition, the House Ways and Means Committee Chairman Dave Camp (R - Michigan), who was leading a conference committee to resolve differences on the bill, while praising the fact that there would not be a tax increase next month, pointed out that “because of the President’s failed economic policies, far too many families are still struggling and this tax relief is necessary. However, we should remember that the real goal remains a strong, vibrant and job-creating economy, and true tax reform is the best way to get there.”

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