Congress Adds Payroll Tax Cut to Gov’t Credit Card
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Congress Adds Payroll Tax Cut to Gov’t Credit Card

iStock/The Fiscal Times

So much for Congress’s vaunted“pay as you go” concept. In the same week that Republicans skewered President Obama for unveiling a new budget that will keep the deficit well above $600 billion a year for the next decade,  House and Senate GOP leaders are ready to whip out their credit cards and add the $100 billion cost of a major payroll tax cut extension to the national debt.

This stunning turnabout likely will occur this week, following a tentative agreement Tuesday evening by House and Senate negotiators on a bipartisan framework that includes extending a two percentage-point reduction in the Social Security payroll tax cut for an additional ten months, but without approving offsetting spending cuts or tax increases. Instead, House Republican leaders, with the Democrats’ blessing, will likely declare an “emergency” and approve the tax cut extension by simply adding it to the burgeoning deficit.

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The tentative agreement will also include a continuation of long-term unemployment benefits and a measure to avert deep cuts in Medicare reimbursement rates for physicians, but lawmakers must still decide on spending cuts to offset the cost. A final agreement could be announced as soon as Wednesday and approved by Friday.

There is nothing new about Congress running up the deficit to pay for major tax cuts: the two Bush era tax cuts have been draining the Treasury of trillions for years.  What’s different is that House and Senate Republican leaders for months have been promising to pay for the tax break by cutting away at other government programs and resisting Democratic calls for a surtax of sorts on millionaires.

Now the Republicans are somewhat sheepishly urging the use of deficit funding to keep the tax break alive through the election.

Obama on Tuesday morning called it “good news” that House Republicans have agreed to a compromise on the payroll tax break by allowing that piece of the package to be approved without offsetting spending cuts, a concession from their previous position. But, he cautioned that “you can’t take anything for granted here in Washington until my signature is actually on it.” As he has done repeatedly before, the president encouraged Americans to lobby their representatives in Congress to approve the measure “without drama, without delay.”

The package of economic benefits and how to pay for them was discussed at length late Tuesday evening at a closed-door meeting of the House Republican conference. Republican leaders are far less concerned about the unemployment and so called “doc fix” provisions. Those two other provisions could cost an additional $50 billion or more.

House Speaker John Boehner, R-Ohio, the instigator of this move, is struggling to prevent the Democrats and voters from blaming Republicans for blocking an extension of the tax cut – and effectively raising taxes on 160 million Americans – after suffering a similar fate last November at the hands of Obama and Democratic leaders.

As part of the December 2010 deal, which extended the Bush era tax cuts through the end of this year, Obama won the inclusion of a payroll tax cut that reduced individuals’ withholding rate from 6.2 percent to 4.2 percent, giving the average worker an extra $80 a month.

After a high profile showdown with Obama who postponed his Christmas vacation in Hawaii to face down the House Republicans, Boehner and House Majority Leader Eric Cantor of Virginia reluctantly went along with a Senate-passed measure that temporarily extended through the end of February all three benefits aimed at helping the economy. House and Senate Democratic and Republican negotiators then convened a series of meetings to try to work out an agreement for a year-long extension of the three measures.

But the talks , led by Senate Finance Committee Chairman Max Baucus, D-Mont., and House Ways and Means Committee Chairman Dave Camp, R-Mich., had gone  nowhere until now because of fundamental disagreements on whether to finance the benefits soley with spending cuts or raise tax revenues as well, as the Democrats insist.

With a Feb. 29 deadline looming, Boehner surprised everyone by announcing on Monday that he and his lieutenants would be willing to pass stand-alone legislation to extend the payroll tax break with no offsetting spending cuts.

“We passed a fully paid for bill and tried for seven or eight weeks to get Senate Democrats to agree to work on serious bipartisan pay-fors, and thus far they have refused,” Michael Steel, a spokesman for Boehner, told The Fiscal Times yesterday, before the tentative agreement was struck. “It raises a concern that the President and the Senate Democratic leadership are trying to scuttle these talks for political gain.”

Only a week ago, Senate Republican Leader Mitch McConnell of Kentucky told reporters there was no way he would go along with a tax cut extension without offsetting spending cuts. But by Tuesday, he had changed his tune.  “I don’t have a view on it right now, but I certainly understand their feeling of frustration,” McConnell said.

House Minority Leader Nancy Pelosi, D-Calif., issued a statement earlier in the day saying that Democrats “have long proposed bringing this tax cut to the floor without pay-fors and House Democrats will support it so that taxes are not raised on 160 million working Americans.”

Senate Budget Committee Chairman Kent Conrad, D-N.D., a prominent deficit hawk, delivered a surprisingly strong endorsement of that move to reporters, following a Democratic policy luncheon yesterday. “I think it’s far more important to do it in terms of strengthening the economy, because we’re still weak,” he said. “What we need to have is an economic two-step. First thing we’ve got to do is strengthen the economy,” Conrad said. “Second thing we’ve got to do is put in place a plan to deal with our long-term debt. We’ve got to walk and chew gum at the same time.”

But others see the evolving compromise over the payroll tax cut extension  as a bad precedent. “It seems to be yet another surrender to political convenience over fiscal responsibility,” said Robert Bixby, executive director of the anti-deficit Concord Coalition. “If you do it [add to the deficit] for that, why don’t you do it for the unemployment compensation, why don’t you do it for the doc fix? It can really start a slippery slope – which is already pretty darn slippery.”

Lawmakers on both sides of the aisle regularly speak in ominous tones about the evils of the deficit and the need to rein in spending to avoid a debt crisis on a par with Greece. Last summer, with default on the U.S. debt looming, Congress and the president enacted the Budget Control Act of 2011. That tough measure, over time, will achieve $2.4 trillion of deficit reduction by imposing caps on discretionary spending and automatic spending cuts or “sequestration.”

Under so-called “pay-as-you-go” legislation passed by Congress in February 2010, Congress automatically triggers sequestration if it passes a major tax provision like the $100 billion payroll-tax cut without also approving offsetting spending cuts or tax increases. However, Congress can avoid that problem simply declaring that the measure an “emergency.”