Obama’s Payroll Tax-Cut Plan Criticized by U.S. House Republican Leaders

U.S. House Republican leaders objected to President Barack Obama’s plan to cut payroll taxes to stimulate job growth, saying it would lead to too large a boost in taxes later when the temporary break ended.

In a memo to House Republicans yesterday, House Speaker John Boehner, Majority Leader Eric Cantor and other leaders detailed several criticisms of the payroll tax idea, a key component of Obama’s $447 billion jobs plan. The lawmakers said an added tax burden would result when, under the president’s plan, an extension and expansion of a “holiday” on such taxes for employees and employers would expire in 2013.

“There may be significant unforeseen downsides to large temporary tax cuts immediately followed by large tax increases,” they wrote. The leaders added they hope “honest and fruitful discussions” with the White House could yield an accord on the tax provision that could be supported by lawmakers in both parties.

Obama’s jobs plan has run into bipartisan resistance. Republicans say the package of tax and spending measures he proposed Sept. 8 relies too heavily on ideas such as added spending on infrastructure and to modernize schools that were already used in 2009’s economic stimulus. They say the nation’s 9.1 percent unemployment rate is evidence the earlier measure didn’t work.

Republican leaders and some Democrats also oppose tax increases Obama proposed to help offset the costs, including higher taxes on investment income and on the oil and gas industries.

Common Ground

The payroll tax-cut proposal is designed to encourage employers to expand their payrolls and boost consumer spending.

The president wants workers to pay 3.1 percent of wages up to $106,800 in Social Security payroll taxes, down from 4.2 percent this year and 6.2 percent in a typical year. He proposed a similar cut to employers’ side of the payroll tax for the first $5 million of a company’s wages and a complete payroll tax holiday for the first $50 million in increased payroll in 2012.

The House Republican leaders raised other concerns about the payroll tax cut, in addition to the tax burden upon expiration. They said Obama’s proposal to offset the forgone revenue by limiting itemized deductions for wealthier taxpayers would hurt fundraising by “thousands of churches and nonprofits.”

The Republican leaders also objected to Obama’s call for $30 billion in payments to state and local governments and a $15 billion initiative to refurbish homes. They said the home- improvement proposal is too similar to an existing program that has generated “allegations of misuse of funds” and too little evidence of results.

Road Construction

They also questioned the president’s proposal for $50 billion in road construction funds and creation of a new infrastructure bank, in part because added spending would come before changes are made to the system for deciding which projects get funded.

The House leaders cited some areas of Obama’s proposal as potential common ground. They gave their strongest support to a proposal to let companies write off 100 percent of capital expenses in 2012, continuing a break that started in September 2010. The break, estimated to cost $5 billion, would let companies take deductions faster than they otherwise would.

Experts, including economist Christopher House of the University of Michigan, say expensing is not that powerful an incentive when interest rates are at near-historic lows, as they are now. Many companies can borrow money if they need it now instead of accelerating tax deductions.

Less Generous

If Congress doesn’t act, a less generous bonus depreciation schedule would be in effect for 2012 before normal rules resume in 2013.

The Republicans said they want to expand on Obama’s call to delay the effective date of a law requiring the federal, state and many local governments to withhold 3 percent of payments to contractors in an attempt to combat tax cheating by companies that do business with the public sector.

Obama is seeking a one-year delay to make the rules take effect in 2014. Republicans, backed by the U.S. Chamber of Commerce and contractors, plan to try to repeal the requirement with legislation this year.

The Republicans said they wanted to work with Obama on a portion of his proposal that would extend and expand tax credits for hiring veterans. They didn’t endorse his specific proposal.

“We believe there is an opportunity to make meaningful and significant progress in this area,” they wrote.

To contact the reporters on this story: Laura Litvan in Washington at llitvan@bloomberg.net; Richard Rubin in Washington at rrubin12@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net

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