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Democrats Plan Senate Test on Payroll Levy Cut With Surtax Added

U.S. Senate Democrats are planning to force a vote as early as this week on pairing a 3.25 percent surtax on income over $1 million with an extension and expansion of an expiring payroll tax cut.

The first vote on the $265 billion proposal will test Democrats’ resolve to implement the largest part of President Barack Obama’s jobs plan and Republicans’ willingness to block that effort.

Senate leaders from both parties signaled yesterday that the first attempt at passage would likely fail. Democrats accused Republicans of trying to harm the economy to improve their political prospects in the 2012 elections and said they would hold repeated votes to make their point.

“The Republicans are giving themselves whiplash on the issue of taxes,” Charles Schumer of New York, the Senate’s third-ranking Democrat, told reporters on a conference call. “The public is starting to figure out that Republicans have one position on taxes when it comes to the wealthy and another when it comes to everybody else.”

If Congress doesn’t act, a 2 percentage point cut in the payroll tax for workers will expire Dec. 31. The Democrats’ proposal would cut the 6.2 percent Social Security portion of the payroll tax in half for workers, cut the employer portion in half for companies on their first $5 million in wages and eliminate the employer tax on certain wage growth.

Political Ploy

Senate Minority Leader Mitch McConnell, a Kentucky Republican, said the Democrats’ attempt to pair temporary tax cuts with permanent tax increases was a political ploy rather than a sincere attempt to pass legislation.

“We should do what we were sent here to do, and that means more bill signings and fewer bus tours,” McConnell said, alluding to Obama’s attempts to sell the jobs plan he proposed in September.

Democrats control 53 votes in the 100-member Senate, leaving them short of the 60 needed to overcome parliamentary moves by Republicans that block legislation.

The 3.25 percent surtax would apply to modified adjusted gross income over $1 million for single filers and married couples filing taxes jointly. It would take effect in 2013, according to a bill summary provided by Senate Democrats.

Democrats could offer a smaller tax increase and still cover the cost of their plan if they limited the payroll tax proposal to an extension of the current rates.

Finding common ground by the end of the year could be difficult, in part because Senate Republicans don’t appear to have a common position yet.

Budget Cuts

Some, like Lindsey Graham of South Carolina, want to extend the payroll tax cut and offset it with budget cuts elsewhere. He suggested cutting government waste.

Senator Richard Lugar, an Indiana Republican, said he wanted to offset a payroll cut extension while adopting a fallback position that would allow the cost to be added to the budget deficit.

“If we cannot, ultimately I would favor extending it for the sake of the economy recovering,” he said in an interview yesterday.

Senator Mike Enzi, a Wyoming Republican, said he favored letting the provision expire.

“I don’t think that’s created a single job,” he said yesterday. “I think there are people who took advantage of it, but I don’t think it created jobs.”

Economic Spur

Payroll tax cuts spur consumer spending and increase employment, according to the Congressional Budget Office.

The debate over the payroll tax cut continues the two parties’ clashes over economic and fiscal policy. The payroll tax-cut extension and expansion are part of Obama’s $447 billion job-creation proposal.

The existing payroll tax cut is one of several items that expire by the end of the year, including expanded unemployment benefits, a delay in scheduled cuts in Medicare payments to doctors, and miscellaneous tax breaks.

Michael Steel, a spokesman for House Speaker John Boehner, an Ohio Republican, said in a statement that the proposal by Senate Democrats would hurt businesses that report profits on their owners’ individual tax returns.

“Republicans have said that extending the payroll tax break is a potential area of common ground, but coupling it with a job-killing tax hike on small businesses makes no sense whatsoever,” Steel said yesterday. “It looks like Washington Democrats are playing politics with American jobs -- again.”

To contact the reporter on this story: 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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