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US House Approves GOP's Payroll Tax Extension Bill

by Mike Godfrey, Tax-News.com, Washington

15 December 2011


The Republican-led United States House of Representatives has passed the Middle Class Tax Relief & Job Creation bill, the Republican Party’s package to extend the payroll tax cuts that will otherwise expire at the end of the year; but it is unlikely to pass the Democrat-led Senate without changes.

President Barack Obama has proposed both an extension for a further year of the existing payroll tax cut from 6.2% to 4.2%, and also a reduction in the tax to 3.1% for the first USD5m of a firm’s payroll and a payroll tax holiday for firms that increase their payroll by adding new workers, with a cap at the first USD50m in payroll increases.

It has been estimated that a one-year extension of the current 4.2% rate would probably cost some USD120bn, but a full application of the President’s proposals would take a total of more than USD250bn out of federal tax revenues. With both parties agreeing with the President that payroll tax cuts will have to be extended, but disagreeing fundamentally on how the cost would be funded, a simple extension to the existing cut would appear to be the best that can be achieved.

The Democrat Party in the Senate have proposed funding the proposals by a “surtax on millionaires”. In their original proposal, a rate of 3.25% would be levied on all individuals with an income, from 2012 onwards, of USD1m. Following a rejection of that proposal out of hand by Republicans, the surtax was reduced in a subsequent Democrat counter-offer to 1.9%.

However, such a tax, at whatever rate, is never likely to be acceptable to Republicans, as they will always consider it to be an attack on small business owners that would reduce investment. The House Ways and Means Chairman Dave Camp (R - Michigan) has already said that the Democrat proposal would mean that: “If the payroll tax cut is extended, it should be paid for with spending cuts, not with job-killing tax hikes that weaken our economy”.

Camp is the sponsor of the Middle Class Tax Relief & Job Creation bill, which would provide for a one-year extension to the existing 2% reduction to the payroll tax, but reject the Democrats’ plan to “increase taxes on job creators”, while also reforming the federal unemployment insurance programme and extending the 100% depreciation allowance for businesses into 2012.

Rather than the Democrats’ surtax, Camp’s bill fully funds the payroll tax relief and reforms to unemployment insurance with spending cuts in government programmes. That includes extending the current pay freeze for federal workers, gradually increasing Medicare premiums for high income beneficiaries and prohibiting millionaires from receiving unemployment insurance and food stamp benefits.

Following the bill’s passage through the House, he declared: “In addition to providing a one-year payroll tax holiday that is fully paid for and protects social security, this bill extends and makes much-needed reforms to our unemployment insurance programme. This will help Americans who are looking for work get a pay cheque instead of an unemployment cheque.”

"Importantly, this legislation was paid for by reducing Washington’s out-of-control spending – not with more borrowing, more debt and more job-killing tax hikes,” he added.

The Speaker of the House, John Boehner (R - Ohio), said that the bill would be a “first big step toward creating jobs in America.

"We’ve got a reasonable, responsible bill that really will help the American people, really will help create jobs. I’m glad that we are where we are, and I look forward to the Senate taking up our bill and passing it,” he remarked.

However, passage of the bill through the Senate in its present form is unlikely to happen, particularly as the Republican proposals include, as an additional measure, an accelerated decision on the controversial Keystone XL US-Canada energy pipeline, which the President had delayed until after the elections next year, by submitting it to a review by the State Department.

The Republican bill would require that, within 60 days, the project should be granted a permit unless the President determines the project is not in the national interest. Both the White House and the Democrat Party have seized on the inclusion of the Keystone project as a sign of bad faith by Republicans.

While, in a previous press statement, the White House recorded that there should not be “a situation where Republican leaders in Congress should be bargaining for political priorities in exchange for giving this President the payroll tax cut,” the President has now re-confirmed his opposition, adding that “Congress should not finish their business before finishing the business of the American people. They cannot go on vacation before agreeing to prevent a tax hike on 160m Americans and extending unemployment insurance.”

While it is still expected that, in the eleventh hour, Republicans and Democrats will come to an agreement, it is also noteworthy that there is a package of other tax breaks that would need to be extended before the end of the year, or they will fall away, while a federal government spending bill, which is said to be largely agreed between the parties, will also have to be passed through Congress.

TAGS: individuals | tax | small business | business | law | corporation tax | payroll | legislation | social security | United States | tax breaks | individual income tax

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