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Payroll tax: Why Congress can't agree

Both parties want to extend the Social Security tax cut, but they disagree sharply over how to pay for it. Plus, politics is at play in dictating what discussions to have when.

By MSN Money Partner Dec 22, 2011 3:03PM

This article is by Alan Fram of The Associated Press.


If President Barack Obama, the House and the Senate all want to extend a Social Security payroll tax cut and jobless benefits through next year, why are they fighting so bitterly over doing it?


Obama, House Democrats and lopsided majorities of both parties in the Senate want to immediately renew the tax cut and jobless benefits for the next two months, and find a way later to extend them through 2012. House Republicans want to do it for a full year right away.


That doesn't sound like an unbridgeable gap. Yet the fight has evolved into a year-end partsan grudge match with no clear resolution in sight and with huge political and economic stakes.


Without action, the payroll tax paid by 160 million workers will rise by 2 percentage points to 6.2% on Jan. 1. That would mean $1,000 a year less in the pockets of people making $50,000, or about $19 weekly. In addition, 3 million people currently receiving long-term jobless benefits will begin to lose weekly payments that average under $300 — for many, their only support.


Following is a guided tour, in question and answer form, through the dispute.


Q: Why do Obama and the Senate want to extend the tax cut and jobless benefits by only two months?


A: Actually, they don't. When the Senate voted overwhelmingly last weekend for a two-month bill backed by Obama, it was a fallback position after Senate Majority Leader Harry Reid, D-Nev., and Minority Leader Mitch McConnell, R-Ky., disagreed over ways to pay for a yearlong extension. Both sides agreed they would not let the bill increase long-term deficits.

(Post continues after video.)

The Senate's two-month version continues the payroll tax and jobless benefits at this year's levels and costs $33 billion. The bargainers agreed to pay for that by raising fees people pay for new mortgages or refinancing insured by Fannie Mae and Freddie Mac, the government-backed mortgage companies. For a $200,000 mortgage, the fee increase would raise a borrower's cost about $17 a month.


A full-year extension would cost around $200 billion, and the two sides couldn't agree on how to pay for that. So they agreed on a bill extending the tax cuts and jobless benefits through February, and then they would return early next year to resolve their differences over a yearlong measure.


Q: The government spends over $3.5 trillion every year. How hard can it be to find another $170 billion or so in savings?


A: It's been tough because of the math and the ways each side would do it.

The two parties seemed to agree that additional savings could come from a federal sale of parts of the broadcast spectrum, and by requiring government workers to contribute more to their pensions. Beyond that are vast differences, substantive and political.


A yearlong extension that the GOP-run House passed this month would make higher-income seniors pay more for Medicare coverage and cut spending for parts of Obama's health care overhaul law enacted last year. Those provisions, taken from earlier Obama proposals, are opposed by congressional Democrats.


Democrats have proposed paying for a one-year extension of the payroll tax and federal unemployment benefits by imposing a 1.9% surtax on income above $1 million a year, a non-starter with Republicans. During talks between top Senate Democrats and Republicans, Democrats also proposed other ways of boosting levies on the wealthy, but those were rejected.


Q: Are there any other differences?


A: They're also fighting over the jobless benefits taxpayers should provide as the economy slowly improves.


Democrats want to keep the current structure. Most states provide 26 weeks of unemployment coverage, and federal programs enacted since the recession boost the eligibility up to 99 weeks in some states.


The House-passed bill would pare that total coverage to a maximum 79 weeks. That probably would fall even further in some states as employment improves. The House bill also requires benefit recipients without high school diplomas to pursue education alternatives and lets states test recipients for drug use.


Q: While they work through these differences, why the fuss over whether Congress first approves a two-month or a one-year plan?


A: For one thing, many freshman and conservative House Republicans are tired of compromising with the Senate and want their leaders to take a stand. They also say a two-month extension of the payroll tax cut would create uncertainty for taxpayers and businesses and problems for employers' payroll systems.


Many House Republicans hate the idea of keeping the issue alive until March 1, when the two-month bill would expire. Democrats have damaged Republicans politically with proposals to pay for the payroll tax cut by boosting levies on the rich. GOP lawmakers solidly oppose that approach, saying it would discourage job creation, and Democrats have used that to argue that Republicans are defending the wealthy at the expense of the middle class.


That's not an argument Republicans want to spend the 2012 election year having. As a result, many want to avoid additional votes on the matter next year, and they don't want to let Obama spend next month's State of the Union address discussing it. They would rather spend 2012 voting on issues they feel are on their terrain, like blocking Obama administration regulations, reducing the size of government and cutting its spending.


Q: What about Democrats?


A: They say the tax cut and unemployment coverage must be renewed to protect the millions who would be hurt Jan. 1. They also have no desire to surrender leverage by abandoning the two-month deal negotiated by the Senate's Reid and McConnell.

But they, too, have political motivations.


Democrats cite economists who say the payroll tax would pump enough money into the economy to help it grow slightly next year. Knowing that the 2012 presidential and congressional races are likely to hinge on the economy's performance, they want to take no chances with anything that might tip the economy in the wrong direction. To them, that means the payroll tax cut and extra jobless coverage must be extended.


Q: Wouldn't these bills also prevent a scheduled cut in reimbursements to doctors who treat Medicare patients?


A: Yes, a 27% reduction takes effect next month unless Congress acts. Doctors say that cut would discourage physicians from treating the elderly people served by Medicare. Neither party wants to anger older voters by limiting their access to doctors.


Copyright 2011 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.


More from MSN Money:


Dec 22, 2011 3:52PM

All but 6 Republicans in the house and 7 in the senate and a number of Democrats have signed "The Pledge" not to raise taxes even in an emergency!


No member of congress should sign anything that prevents them from making their voting decisions based on their best judgment as to what is best for their constituents and the country.

Dec 22, 2011 4:04PM

It's not just about the payroll tax, it's about the Mortgage refinancing costs that is tacked on EVERY MONTH ($17 for a 200K refi) If they pass this bill the payroll tax part would only be for 2 months???. Then everyone would forget about what happened and in the mean time would shell out that $17 bucks per month when refinancing. This would be with anyone who would refinance for whatever amount that would be. A $100K would probably be around $9 per month fee. OH, I just thought of something, they would then be able to higher that % in future years to increase to whatever level the government wants you to pay for refinancing. That's just for every home owner. So, what other incentive would someone need to own a home? 


The congress needs to work on long term solutions, not 2 month increments. If they vote for this I'll be one of the first to help vote them out of office.

Dec 22, 2011 5:00PM
Forget it - it is stupid.  Let the Bush tax cuts expire too - for all income levels.  It is not like we have the money.  We are borrowing the money from foreign governments.  If you want $500, $1,000, or even $5,000 more in cash next year, just take out a loan at your local credit union. Sheesh - what's the difference?  I know, you are hoping to make some one else pay back the Uncle Sam loan aren't you?!!
Dec 22, 2011 6:04PM

First of all; this reduction in the payroll tax should never have been implemented for 2011.  The SS Trust Fund is already running out of funds and this just made it worse.  What I want everyone to realize is this is the OBAMA TAX CUT and not a BUSH tax cut, -so, lets refer to it as such.


What should happen ?- increase the amount subject to the payroll tax to $200,000, but do not change the benefit amount to these people.  This would increase the coffers tremendously each year.  Make those in retirement making more than $100,000 a year  pay more for Medicare premiums.


The best 2 things to improve Medicare are


1. Start collecting a minimum $3 to $5 co pay for every doctor visit for everyone on Medicare and maybe more for those making over $150,000.. 

2. Really eliminate the fraud in this system - I hear from Dems and Reps that this will be addressed - but it never is.


President Obama asked for a 1 year extension for 2012 in the payroll tax reduction (he even asked for an additional cut from 2% to 3% for the employee and 3% for the employer) in his original request for 2012.  To say the Senate did their job is BULL**** (Harry Reid should never return to Washington, DC).  He is a a terrible Senator and his state, Nevada has about the worst unemployment rate and housing foreclosure issues in the country.


We need the pipeline from Canada and I am glad the House made this a part of the bill, even though I think each piece of legislation should have a straight up or down vote on its own with no other spending proposals tied to them.


President Obama is just about GREEN JOBS and does not care what we spend for fuel as citizens of this country oir how it is destrying our country.  We do not need anymore SOLYNDRA'S.  Let the free market figure out what will work and is cost effective (WITHOUT) FEDERAL SUBSIDIES!


Stop sending money to country's that hate us and help people in this country!


Thank God for the churches and other non profits who try their best to help those in need and really do a great job.  I know I am proud of all my church does for our community, thanks to not being in debt on new facilities!.


MERRY CHRISTMAS to everyone except our IDIOTS IN WASHINGTON, DC, who say they are there to HELP US!

Dec 22, 2011 3:57PM

Most of the presidential candidates have signed the "PLEDGE" talso.


I guess they can't think for themselves and don't want to lose their Super Rich donors.

Dec 22, 2011 6:05PM

You know what will happen....

5 years from now they will point to the 2% payroll tax holiday and say "It has bankrupted social security!".  Sorry we miscalculated!  Sorry we overspent!

Dec 23, 2011 1:00PM

You know what will happen....

5 years from now they will point to the 2% payroll tax holiday and say "It has bankrupted social security!". Sorry we miscalculated! Sorry we overspent

could not agree more - I have said this on other posts - we have been told for years that the Trust Fund is in trouble.  How can LOWERING the amount that goes into it possibly help anything?  As a senior who is now drawing SS, married to another retiree and still working part-time during the tax season I will see a negligible difference in my income. 


Based on the type of returns I am seeing the last two years the country would be better off  if the unemployed could take money from their 401ks and IRA's without penalty to pay their mortgages and health care costs.  That is legislation that could make a real difference.  I have too many clients who have faced the loss of their homes, and bankruptcy through health care costs that they couldn't pay, also facing years of payments to IRS because they used up their savings (401ks and IRA's) trying to stave off the 'beast' while being optimistic that things will get better, and now they have to pay additional taxes as well as having nothing left for the future. 


Because they are relatively young (many in their 40's and 50's) they do not qualify for Offer in Compromise as they are considered to have potential to pay in the future if they are ever employed again.    The best they can hope for is for payments to be temporarily suspended until they can find work.  In the meantime they are crowding into a relatives' basement since they can't even rent an apartment as they have no regular income and no landlord will take them.  They are the unseen homeless.   These folks are pawning jewelry and other possessions and selling off the car and household goods acquired when things were better.  Check out CraigsList and your local paper.  There is a sad story behind many items.  Wedding dresses and rings, furniture, baby equipment, tools, electronics.  There but for the Grace of God go many of us....

Dec 22, 2011 4:34PM
Tax will eventually have to go up and it may have adverse effects. Unemployment is a function of money supply. When the money supply deflates, people cannot possibly be employed at levels that allow them to earn the monetary bubble level incomes. Google for "unemployment kondratieff wave" to see another way to look at unemployment: Count who is actually employed.

Dec 22, 2011 6:12PM
Also- the mortgage tax to pay for this 1 year extension will be paid for OVER 10 YEARS from the collecting of this so called mortgage tax.  HOW ABSURD!  It should be paid for in 1 year from actual reductions in spending.  I do not think people finacning homes should have to be singled out to pay for this.  Again, our Congress will not bite the bullet and make REAL SPENDING CUTS.  It is all fluff that will go away when a new Congress convenes.
Dec 22, 2011 5:32PM

I was going to say something profound, but I could not come up with anything.  I'm so damn mad at "our" Washington D.C. legislatures I could scream (I just did)!


All I can say they have their thumbs up their you know what and are so out of touch with the real problems, I CANNOT wait until 12-06-12 to boot them all out and start fresh will ALL new legislators...who knows, the unpolished politician may have some common sense!

Dec 22, 2011 4:20PM
Gee i am glad this pres is not doing things like in the past.  He is doing it worse.
Dec 23, 2011 12:15PM
Obama's Christmas vacation to Hawaii will cost the taxpayers $ 4 million dollars.  O boy I get to keep $40.00 Thanks A Lot.  My neighbor say's, he will get to buy that extra rock of crack, next pay check.
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