Take-Home Pay Set to Decline in 2012 as Positions Harden on Worker Tax Cut

Paychecks for 160 million workers will be reduced in January unless lawmakers break a stalemate that could dent U.S. economic growth and poses political difficulties for a Congress with low public approval ratings.

House Speaker John Boehner and Senate Majority Leader Harry Reid kept up the pressure on each other today while showing no intention of making concessions on a tax-cut extension that would break the logjam. President Barack Obama insisted yesterday that the only way to avert a payroll tax increase for workers in January is for the House to send him a two-month deal the Senate passed Dec. 17.

Boehner and the Republican-controlled House voted 229-193 yesterday, with no Democratic support, to reject the two-month bipartisan Senate measure and call for a yearlong extension of the tax cut.

The roll call was structured in a way that let lawmakers vote “yes” in an effort to avoid the appearance that Republicans were vetoing a tax cut and violating a bedrock principle of the party. The House maneuver allowed it to move directly to a conference committee with the Senate that Reid, a Nevada Democrat, had already rejected.

Boehner, an Ohio Republican, met today with eight House Republicans chosen to negotiate a resolution and demanded that Democrats name lawmakers to join the deliberations.

‘The Same Thing’

The president and bipartisan congressional leaders “have all really asked for the same thing over the course of the last several months: Let’s extend the payroll tax credit for a year,” Boehner said.

In a letter to Boehner today, Reid reiterated that he won’t negotiate on a longer-term extension of the tax cut and other expiring laws until the two-month deal is completed.

“I am fully confident that we can work out our differences and find common ground on a yearlong extension,” he wrote. “But in the meantime, families should not have to worry that they will wake up to a tax increase on Jan. 1, 2012.”

The Republicans’ “political strategy mystifies me” because “you can’t win by walking away doing nothing,” Democratic Representative Jim McDermott of Washington, a member of the tax-writing House Ways and Means Committee, said in an interview yesterday. “The Senate has put down a very, very firm mark. They are not going to move.”

4.2 Percent Tax

A lower payroll-tax rate of 4.2 percent is set to expire Dec. 31, at which point the employee portion of the tax that funds Social Security will rise to 6.2 percent. Extending the tax cut has been a focus of the jobs plan that Obama proposed in September.

An emphasis on middle-class concerns has helped Obama’s public approval ratings, with 49 percent of Americans approving of how he is handling his job, the highest since May, according to a new ABC News/Washington Post poll and another conducted for CNN. Meanwhile, a Dec. 7-11 Pew Research Center poll found that 40 percent of adults blame Republican leaders for a “do- nothing” Congress, while 23 percent blame Democrats.

Democrats yesterday called on Republicans to relent and pass the Senate bill.

“What we are dealing with today is a legislative tantrum,” said Representative Earl Blumenauer of Oregon.

Paying the Cost

Most lawmakers agree that the tax cut should be extended through 2012. They differ on how to cover the cost to the Treasury and on what other policy changes they want to accompany the tax cut. Senate Democrats want to pay part of its cost with a surtax on incomes exceeding $1 million, which Republicans oppose, and House Republicans have voted to pay for the bill through such measures as freezing the pay of federal civilian employees.

The power struggle is notable because in the past week Democrats and Republicans made progress in reaching agreement on the two-month plan, which would give them time for negotiations on a longer-term proposal when they return from the holiday recess. Senate Republican leader Mitch McConnell worked out the short-term measure with Reid, which was backed by 39 Republicans in the 89-10 Senate vote for passage.

Republican Senators Richard Lugar of Indiana, Scott Brown of Massachusetts, Olympia Snowe of Maine and Dean Heller of Nevada have criticized the actions of their House counterparts.

“It angers me that House Republicans would rather continue playing politics than find solutions,” Brown said in a statement yesterday. “Their actions will hurt American families and be detrimental to our fragile economy.”

Consumer Spending

The impasse could hurt consumer spending and economic growth. In addition to the payroll tax cut, expanded unemployment benefits will expire, and doctors would receive smaller Medicare reimbursements starting in January.

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. (JPM) in New York.

House Republicans maintain that a short-term extension wouldn’t provide the certainty that businesses need for planning and would cause administrative hassles for payroll providers and employers.

“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 Ways and Means Committee. “There’s no reason why we can’t resolve the differences between the House-Senate versions before the end of the year.”

Conference Committee

Republicans say there is still time to negotiate an agreement in the conference committee the House voted to set up yesterday. Boehner appointed to the panel Republican Representatives Camp, Kevin Brady of Texas, Renee Ellmers of North Carolina, Nan Hayworth of New York, Tom Price of Georgia, Tom Reed of New York, Fred Upton of Michigan and Greg Walden of Oregon.

A schedule announcement from the office of Majority Leader Eric Cantor of Virginia said House members would recess, though negotiators and House leaders will be available to consider a conference. Members could be called back to Washington with 24 hours notice, the announcement said.

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

In a statement issued after yesterday’s vote, Reid called the House action “unconscionable.”

‘The Clock Ticks’

“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,” Reid said.

Some Democrats disputed the Republican assertion that both sides were close to an agreement that could avert the tax cut from lapsing.

“We just watched the supercommittee made up of three members from each caucus sit for eight weeks and come up with absolutely nothing” on deficit reduction, McDermott said. “Why would they think having a conference committee on this issue is going to come up with anything when the goal of the Republicans is to never make the president look good?”

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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