House Blocks Payroll Tax Break

The U.S. House of Representatives rejected a two-month extension of an expiring payroll tax cut, escalating a clash with the Senate and President Barack Obama that may result in smaller paychecks for workers in January.

In a 229-193 vote, the House requested formal negotiations on a payroll tax cut extension with the Senate, where Democratic leaders say they won't discuss a year-long agreement until the short-term deal is completed. All House Democrats joined seven Republicans in voting against the Republican rejection.

The impasse might hurt consumer spending and economic growth. If Congress can't reach agreement, the 2-percentage- point payroll tax cut would expire Dec. 31 and workers' paychecks would be reduced. Expanded unemployment benefits also would expire, and doctors would receive smaller Medicare reimbursements starting in January.

“Our economy is too weak and the American people have been struggling for far too long” for Congress to come up short of an agreement, said Representative Dave Camp, a Michigan Republican and chairman of the House Ways and Means Committee. “We have two weeks to find a solution.”

White House spokesman Jay Carney called the House vote “most unfortunate.” He said the president shouldn't need to be a “marriage counselor” between the House and Senate.

Most lawmakers agree that the tax cut should ultimately be extended through 2012. They differ on how to cover the cost to the Treasury and on what other policy changes should accompany the extensions.

Over the past two weeks, those disagreements have ballooned into a high-stakes partisan power struggle. Each party is preparing to blame the other if the tax cut expires and they begin discussing retroactive laws.

“You have said many times that Congress must do its work before taking vacation,” House Speaker John Boehner wrote in a letter to Obama today. “Because we agree, our negotiators and the House stand ready to work through the holidays. I ask you to call on the Senate to return to appoint negotiators so that we can provide the American people the economic certainty they need.”

Democrats maintain that the best way to provide certainty would be to pass the two-month extension and then work on the longer-term proposal.

'Unconscionable'

In a statement issued after today's vote, Senate Majority Leader Harry Reid called the House action ''unconscionable'' and again insisted he wouldn't negotiate until the two-month tax cut extension is passed.

''As the clock ticks towards a middle-class tax hike, I would implore Speaker Boehner to listen to the sensible Senate Republicans and courageous House Republicans who are calling on him to take the responsible path,'' he said.

Failure to enact the legislation would reduce economic growth by 1.5 percentage points in the first half of 2012, according to a forecast by Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. The world's largest economy will grow at an average 1 percent annual pace in the first six months of the year should the tax cut lapse, or by 2.5 percent if it's extended, Feroli said in a Dec. 16 note to clients.

House Republicans maintain that a two-month extension of the tax cut passed by the Senate 89-10 on Dec. 17 would fail to provide the certainty that businesses need and would cause administrative hassles for payroll providers and employers. They have said they're willing to work through the rest of the year to reach an agreement.

House leaders haven't announced formally whether all of the members will stay in Washington, or whether they will be free to leave after votes are concluded today.

Illinois Representative Peter Roskam, the chief deputy Republican whip, said he expected that leaders would advise House members to keep their schedules flexible and be prepared to return to Washington if needed on short notice.

Robert Aderholt, an Alabama Republican, told reporters that he expected to come back next week.

''We're standing on principle,” he said. “We're trying to get things done through regular order. I'm very comfortable defending that position.”

The House-passed bill, which includes a year-long extension of the tax cut, cost $202.4 billion in forgone revenue. The parties disagree on how to cover the cost of the bill so that it doesn't add to the federal budget deficit. The payroll tax funds Social Security. It also included spending cuts, such as a pay freeze for civilian federal employees and Medicare premium increases for high-income taxpayers.

$33 Billion

The Senate's $33 billion bill would require Obama to make a decision within 60 days on TransCanada Corp.'s Keystone XL oil pipeline. The bill's cost is covered by raising the guarantee fees that Fannie Mae, Freddie Mac and the Federal Housing Administration charge to lenders for new mortgages.

Senators' attempt to negotiate a year-long extension or even an 11-month extension fell short because lawmakers couldn't agree on how to pay for the provision.

Bloomberg News

Complete your profile to continue reading and get FREE access to Treasury & Risk, part of your ALM digital membership.

Your access to unlimited Treasury & Risk content isn’t changing.
Once you are an ALM digital member, you’ll receive:

Thought leadership on regulatory changes, economic trends, corporate success stories, and tactical solutions for treasurers, CFOs, risk managers, controllers, and other finance professionals
Informative weekly newsletter featuring news, analysis, real-world case studies, and other critical content
Educational webcasts, white papers, and ebooks from industry thought leaders
Critical coverage of the employee benefits and financial advisory markets on our other ALM sites, PropertyCasualty360 and ThinkAdvisor