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Congress Passes Payroll Tax-Cut Extension

The U.S. Congress passed a two-month payroll tax-cut extension eight days before its scheduled expiration after House Republicans dropped their objections under growing political pressure.

“This is some good news, just in the nick of time for the holidays,” said President Barack Obama, who signed the legislation. “When Congress returns I urge them to keep working without drama, without delay, to reach an agreement” on extending the tax cut for all of 2012, he said.

Similar to a plan passed by the Senate Dec. 17, the measure would extend a two-percentage-point payroll tax cut, continue expanded unemployment benefits and head off a reduction in Medicare payments to doctors through February. Lawmakers plan to negotiate on a longer-term extension in the new year.

Passage capped a year of partisan battles that brought the U.S. to the brink of four government shutdowns and a government default on obligations to bondholders. Today’s approval of the tax measure in both chambers by unanimous consent came only after House Republicans surrendered to attacks from Obama, congressional Democrats and Senate Republicans angered by the House’s push for a yearlong extension days before the holidays.

“I hope this Congress has had a very good learning experience, especially those who are newer to this body,” Senate Majority Leader Harry Reid, a Nevada Democrat, told reporters after his chamber’s action today. “It seems that everything we’ve done this past year has been a knock-down, drag-out fight. There is no reason to do that.”

New Talks Next Year

The agreement kicks the dispute over extending the tax cut for 160 million U.S. workers into early next year without resolving deep divides over how to cover the cost through 2012.

Democrats are seeking to raise taxes for high-income Americans, and Reid said “nothing is off the table” as he named his negotiators for a longer-term deal. Republicans want to cut the federal workforce and freeze pay for government employees, among other spending-cut options.

Republicans also want to attach to a payroll tax-cut extension policies such as a rewrite of the unemployment system or weaker rules for industrial emissions -- both opposed by Democrats.

The deal that House Speaker John Boehner, an Ohio Republican, and Reid, a Nevada Democrat, agreed to yesterday calls on Obama to accelerate approval of the Keystone XL oil pipeline from Canada.

Weaker Position

Boehner might be in a weaker position in 2012 after presiding over the tumult of recent days, in which Senate Republicans opposed his stance and some House Republicans had begun to defect as well. The talks next year will unfold in the months ahead of a presidential election, making Boehner’s task more difficult.

“I don’t think it’s a time for celebration,” he told reporters yesterday. “Our economy is struggling. We’ve got a lot of work ahead of us in the coming year.”

Some Republicans were pleased to see that Boehner cut his losses.

“The great danger would have been if we continued,” said Representative Tom Cole of Oklahoma. “We made our points. We’ve gotten some modifications.”

6.2 Percent

Without congressional action, the payroll tax for employees would have risen in January to 6.2 percent from the current 4.2 percent. The tax funds Social Security. The measure also averts an end to emergency unemployment benefits set to expire on Dec. 31 and assures doctors that their Medicare reimbursement rates won’t be reduced starting in January.

Michael Feroli, JPMorgan Chase & Co. (JPM)’s New York-based chief U.S. economist, said economic growth would be reduced by 0.5 percentage points in the first quarter and 1.5 percentage points in the second quarter of 2012 if the payroll tax cut and expanded unemployment benefits weren’t continued. Continuation of those measures would allow growth of 2.5 percent in the first half of the year, he said in a Dec. 16 note to clients.

The pressure for Boehner to cut a deal built for days. Republican Senators Olympia Snowe of Maine, Scott Brown of Massachusetts, John McCain of Arizona and Bob Corker of Tennessee criticized Boehner’s move to reject the bipartisan two-month extension after it passed the Senate on Dec. 17.

Boehner became more isolated in his opposition after the top Republican in the Senate, Mitch McConnell of Kentucky, issued a statement yesterday urging the House to pass the short- term measure.

‘Sealed the Deal’

McConnell said the House should pass a bill that averts “any disruption in the payroll tax holiday or other expiring provisions and allows Congress to work on a solution for the longer extensions.”

That statement “sealed the deal” in ending the standoff, said Brian Gardner, the senior vice president for Washington research at KBW Inc.

Boehner held a conference call with Republicans yesterday. On a similar conference call after the Senate’s Dec. 17 passage of the two-month extension, rank-and-file Republicans pressed Boehner to oppose the measure. The House rejected the Senate bill 229-193 on Dec. 20.

House Republicans who participated in yesterday’s call said the tone was much different.

“It wasn’t truly a conference call,” Representative Jack Kingston, a Georgia Republican, said. “It wasn’t a solicitation of opinion.”

Moving Forward

Though most House Republicans still want a yearlong deal, Kingston said it was time for the party to move forward.

“This takes the whole thing off the front page and that’s a good thing,” he said.

Some House Republicans said yesterday they don’t think Boehner’s agreement to pass the two-month extension puts him in immediate danger of losing the support of the Republican majority he leads.

Representative Sean Duffy, a freshman Republican from Wisconsin, said Boehner was trying to reflect the views of his colleagues. Duffy said he is pleased that a tax increase will be avoided in January and doesn’t think the saga would hurt Republicans in the 2012 election.

“I think the American public will look at the economy and job growth and the lack thereof,” Duffy said. “I don’t think this is an indicator of what will happen next year.”

One Difference

Today’s measure includes one difference from the version passed by the Senate. A yearlong payroll tax cut extension would apply to the first $110,100 in wages. To prevent someone from shifting all their income into the first two months of the year, the Senate bill limited the tax break to the first $18,350 a worker earns.

Republicans changed the bill to apply the tax cut to the full $110,100 in wages, according to information provided by the office of House Ways and Means Committee Chairman David Camp, a Michigan Republican. That makes it easier for payroll processors to continue the tax cut if it is extended beyond February.

Workers who earn more than $18,350 during the first two months of the year will pay an additional two-percentage-point tax when they file their returns in 2013.

The bill is H.R. 3765.

To contact the reporters on this story: Laura Litvan in Washington at llitvan@bloomberg.net; Greg Giroux in Washington at ggiroux@bloomberg.net

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

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