US Congress Strikes Payroll Tax Deal

by Mike Godfrey, Tax-News.com, Washington

17 February 2012

United States Republican and Democrat Congressional leaders have agreed a format for the extension of the payroll tax cuts and unemployment benefits from the end of this month, following intense pressure from President Barack Obama.

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

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

Such a difficulty had led the House of Representatives Ways and Means Committee Chairman Dave Camp (R - Michigan), who was leading a conference committee to resolve differences between the Republican-led House and the Democrat-led Senate on the payroll tax cut extension, to issue a statement to the effect that, while the conference members were “committed to resolving the differences between the House and Senate,” he thought it “prudent for our leadership to take whatever action is necessary to ensure American workers are not hit with a tax increase on March 1.”

The lack of an agreement, due to what he regarded as Republican intransigence, then led President Obama, during a subsequent speech, to protest that “Washington shouldn’t hike taxes on working Americans right now. That's the wrong thing to do. But that’s exactly what’s going to happen at the end of this month if Congress doesn’t do something about it. The typical American family will shell out nearly a thousand dollars more in taxes this year.”

He exhorted Congress to “pass this middle-class tax cut. Pass the extension of unemployment insurance. Do it before it’s too late. And I will sign it right away.”

In the event, it appears that Republican leaders in the House have agreed to an extension to the end of December this year, without the identification of sufficient spending cuts to fund them.

During the negotiations, a provision to raise funds by auctioning broadband spectrum has been mentioned, as has a further suggestion to add to federal employees’ mandatory pension contributions, but that may be altered such that any increased contributions would only be required from new employees.

The agreement was made late on February 15, and is expected to be passed, with varying degrees of Republican support, through both sides of Congress shortly. It has become clear that Republican leaders have decided that their best way forward is to support a plan that would not require offsetting spending cuts, so as to kick the difficult political problem up the road beyond the November elections.

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