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US Tax Cut Fight Goes Down To The Wire

by Mike Godfrey, Tax-News.com, Washington

21 December 2011


The fight to extend a temporary payroll tax cut for US workers has gone down to the wire after House Republicans refused to accept a compromise deal approved overwhelmingly by the Senate.

With the bipartisan divide on how the tax cut should be paid for as wide as ever, the Senate managed to agree a short-term fix in a vote on Saturday which would extend lower payroll tax rates for just two months, buying more time for a comprehensive agreement to be reached by lawmakers in both Chambers in the New Year. House Republicans, however, broke with the Senate colleagues on the evening of December 19 and cancelled a vote on the Senate bill, scheduled for December 20, insisting that the tax cuts should be extended for another year or not at all.

“Our members do not want to just punt and do a two-month short-term fix where we have to come back and do this again," said House Speaker John Boehner (R - Ohio). "We’re here. We’re willing to work. We will appoint conferees and we hope the Senate will appoint conferees because we’re willing to get the work done now and do it the right way. "

“It’s become clear that what the Senate did pass is going to cause job creators all kinds of problems," Boehner added. "As we saw the report that came out today by those who actually run payroll systems that there was great confusion about the way the Senate bill was put together. I think it’s time to just do the right thing for the American people. Let’s solve this problem now. We’ll have plenty of time to deal with other issues next year.”

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. While both parties agree with the President that payroll tax cuts will have to be extended, they disagree fundamentally on how the cost would be funded. Senate Democrats previously proposed that a full extension of the tax cut be funded by a “surtax on millionaires”. Republicans however want a pay freeze for federal workers, a gradual increase in Medicare premiums for high income beneficiaries and to prohibit millionaires from receiving unemployment insurance and food stamp benefits.

Senate Majority Leader Harry Reid (D - Nevada), said that it was "unconscionable" for Boehner to block a bipartisan agreement that would protect middle class families from a potential USD1,000 tax rise on January 1.

“I have been working for weeks to negotiate a year-long extension with Republicans. But as we approach the end of the year, it is time to make sure that no matter what else happens, middle class families will not wake up to a tax increase on January 1. I am happy to continue negotiations on a year-long deal as soon as the House of Representatives passes the Senate’s bipartisan compromise, and prevents a tax hike from hitting middle-class families.”

With the two parties even at odds over whether the Senate should return from the Christmas recess to thrash out another compromise deal, or insist that the House pass its version of the bill, this is a fight that not likely to end any time soon.

TAGS: tax | business | law | entrepreneurs | employees | payroll | unemployment | United States

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