Senate Republicans Seek Federal Pay Freeze to Offset Payroll Tax Cut Cost

Republicans in the U.S. Senate want to cover the cost of extending a payroll tax cut by freezing federal workers’ pay through 2015 and reducing the federal civilian workforce by 10 percent, putting them at odds with Democrats over how to pay for the $119.6 billion tax break.

The proposal counters efforts by President Barack Obama and Democrats to expand the payroll tax cut and pay for it by imposing a 3.25 percent surtax on income exceeding $1 million. Senate procedural votes on the competing proposals may occur as soon as today, and lawmakers don’t expect either approach to advance because of differences between the parties.

“This is the same argument we’ve been having time after time, just in different contexts,” Representative John Yarmuth, a Kentucky Democrat, said in an interview yesterday.

A two-percentage-point reduction in the payroll tax for employees expires Dec. 31. Obama has been urging Congress to extend it and expand it. He told an audience in Scranton, Pennsylvania, yesterday that the U.S. economy would suffer a “massive blow” if Congress lets it expire.

“I want to make sure that we do this responsibly,” he said. “So what I’ve said is to pay for this tax cut, we need to ask wealthy Americans to pay their fair share.”

At a New York City fundraiser later yesterday, Obama sounded a more conciliatory note as he referred to recent remarks by House Speaker John Boehner of Ohio and Senate Minority Leader Mitch McConnell of Kentucky.

Middle-Class Families

Obama said the Republican leaders “over the last couple of days” have indicated “that it probably does make sense not to have taxes go up for middle-class families, particularly since they’ve all taken an oath not to raise taxes.” He said “additional progress in the next couple of weeks” may be possible.

Many Republican lawmakers have signed a no-tax-increase pledge promoted by activist Grover Norquist.

Republicans have resisted the Democrats’ tax increases, and lawmakers said they weren’t sure what proposal could win enough support to become law. Representative Tom Cole, an Oklahoma Republican, said members of his party were still trying to reach a consensus among themselves.

“It’s going to come down to what type of spending cuts” Obama is “going to be willing to accept” because “I don’t think you are going to find any Republican appetite to increase taxes,” Cole said.

Republican Proposal

The Senate Republican proposal, introduced yesterday by Dean Heller of Nevada, would generate $222 billion in savings over the next decade by freezing federal pay through 2015 and reducing the civilian workforce by 10 percent. The bill would reduce federal budget deficits by about $111 billion.

The plan also would require the highest earners to pay the full cost of their Medicare premiums and prevent them from receiving unemployment compensation and food stamps.

“It’s about time Washington took a hit for a change,” McConnell said today.

Senate Majority Leader Harry Reid, a Nevada Democrat, said today that the Republican proposal was unacceptable and wouldn’t win Senate passage.

“As usual, the only real target of this Republican meat ax is the American middle class,” he said.

Democrats’ Response

House Minority Leader Nancy Pelosi of California said Democrats are willing to consider spending cuts to help cover the cost of extending the payroll tax cut.

“We would certainly be open to reasonable pay-fors for the tax cut” extension, she told reporters today.

Pelosi said the Republican proposal to reduce the size of the federal workforce doesn’t meet that standard.

“You’re saying we need the tax cut for the middle class so it can create 400,000 jobs and while we’re doing it, we want to eliminate 200,000 jobs,” she said. “It doesn’t make any sense.”

The Social Security portion of payroll taxes, which will be levied on the first $110,100 of income in 2012, is split between employees and employers. Each side typically pays 6.2 percent of wages.

For 2011, the Social Security payroll tax for employees was lowered to 4.2 percent. A worker earning $50,000 a year who is paid biweekly has been saving $38.46 in each paycheck.

At a minimum, Obama wants to see the current tax cut for employees extended for 2012. Senate Democrats are seeking to reduce the payroll levy to 3.1 percent for workers. They would also lower the employer rate to 3.1 percent on the first $5 million in payroll and eliminate the levy entirely for each company’s first $50 million in wage growth.

Tax on Millionaires

The Democrats’ $265 billion proposal would be offset by a permanent 3.25 percent surtax on annual income exceeding $1 million.

Under the Senate Republicans’ proposal, federal agencies would be allowed to hire one worker for every three who leave until the agency’s workforce has been reduced by 10 percent.

The pay freeze would apply to all civilian employees of the executive branch, along with members of Congress and their staffs. The 10 percent workforce reduction doesn’t appear to apply to congressional staff, based on the text of the bill.

“This is an attempt to single out and scapegoat federal employees who had nothing to do with the economic problems the country’s facing while refusing to ask the very well-off in this country to share the responsibility,” said Representative Chris Van Hollen, a Maryland Democrat whose district includes many federal employees.

Other Provisions

House Republicans will come up with a proposal to extend the payroll tax, said Representative Tom Price, a Georgia Republican.

“The payroll tax won’t come by itself,” Price said, predicting that it would be rolled into a package extending a range of provisions set to expire Dec. 31. Price said his support, and that of other like-minded Republicans, would hinge on “what the whole package is at the end.”

Democrats support continuing expanded unemployment benefits that are set to expire Dec. 31. House Democratic Whip Steny Hoyer of Maryland said he thinks Republicans haven’t decided whether to insist on offsetting the cost of those benefits with spending cuts.

Miscellaneous tax breaks and a provision to prevent a scheduled reimbursement cut to doctors under Medicare also expire at the end of the year.

The Democratic payroll tax bill is S. 1917. The Republican bill is S. 1931.

To contact the reporters on this story: Richard Rubin in Washington at rrubin12@bloomberg.net; Steven Sloan in Washington at ssloan7@bloomberg.net

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

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