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Senate Democrats Offer Smaller Surcharge in Payroll Tax Plan

Democrats in the U.S. Senate will seek another vote on a payroll tax cut for workers this week in an attempt to pressure more Republicans to support an extension into 2012.

Legislation proposed by Senate Democrats yesterday would cut the payroll tax paid by employees to 3.1 percent next year from the current 4.2 percent. The $185 billion cost would be covered by a 1.9 percent surtax on annual incomes exceeding $1 million and by raising the fees charged to lenders by government-owned mortgage giants Fannie Mae and Freddie Mac.

The proposal was sponsored by Senator Robert Casey, a Pennsylvania Democrat who is facing a tough race for re-election next year.

The measure nods at concerns Republicans have raised about how to pay for the extension’s cost. The plan reduced the millionaire surtax rate from 3.25 percent to 1.9 percent and incorporated ideas that were raised during negotiations of the bipartisan congressional supercommittee. The proposal also trims the cost by eliminating a proposed payroll tax cut for employers.

Republicans said they were still unlikely to back the plan.

“This was not a compromise,” Minority Leader Mitch McConnell of Kentucky said today on the Senate floor. “This was nothing more than a bill designed to fail.”

Republican Support Needed

Democrats control 53 seats in the Senate and would need the support of at least a few Republicans to secure the 60 votes that will be necessary for passage. Senator Susan Collins of Maine was the only Republican to support advancing a Democratic payroll tax cut proposal last week. Three members of the Democratic caucus opposed the measure, which didn’t clear the 60-vote threshold.

Collins said she backed the Democratic bill last week to “send a signal” that lawmakers can “no longer continue to have these completely partisan votes where each side knows that it’s not going to succeed and it’s really political theater.”

She said she would join Senator Claire McCaskill, a Missouri Democrat, to offer alternative legislation today. That proposal would continue the 4.2 percent payroll tax for workers in 2012 and expand it to employers, according to a summary of the measure. It also would extend several other tax breaks that expire at the end of the year, including those for research and development and bonus depreciation.

Republicans aren’t likely to back the Collins-McCaskill measure because it includes a 2 percent surtax on income exceeding $1 million. Taxpayers who report business income on their individual returns would be exempt from the surtax.

Dec. 31 Deadline

Unless Congress acts, the current two-percentage-point reduction -- from 6.2 percent to 4.2 percent -- in the employee portion of the Social Security payroll tax will expire Dec. 31. Mark Zandi, chief economist at Moody’s Analytics, has said that failure to extend the payroll tax cut into 2012 could shave one-half of one percentage point from U.S. gross domestic product next year.

“Raising taxes by $1,000 next month will have an immediate negative impact on the economy,” Senate Majority Leader Harry Reid, a Nevada Democrat, said on the Senate floor yesterday. “We all know Congress can’t afford to play chicken with this economy.”

President Barack Obama said Republicans would be “leaving 1.3 million Americans out in the cold” next month if they allow the payroll tax cut to lapse.

‘Important Insurance’

“It’s important insurance for them against the unexpected,” Obama told reporters yesterday. “It will spur spending. It will spur hiring and it’s the right thing to do.”

Republican leaders indicated it was unlikely that they could support the proposal. “The only thing bipartisan about adding a tax hike on job creators is the opposition,” said Don Stewart, a spokesman for McConnell.

Senate Minority Whip Jon Kyl, an Arizona Republican, said he doesn’t think the Democratic plan will gain any more votes from his party than it did last week.

“I don’t think it’s different enough to make a significant difference,” he said. “It wouldn’t be enough to get my support.

Senator Orrin Hatch of Utah, the top Republican on the Senate Finance Committee, criticized the surtax proposal in an e-mail, calling it a ‘‘permanent tax hike on small businesses to pay for temporary one-year tax policy.’’

10-Year Surtax

In response to criticism that Democrats were using a permanent tax increase for high earners to offset a temporary payroll tax cut, the legislation proposed yesterday would end the surtax in 10 years.

It also proposes means-testing eligibility for unemployment compensation and food stamps, a provision Republicans included in their plan. Democrats wouldn’t require high earners to pay higher Medicare premiums, as Republicans had earlier proposed.

The plan would require Fannie Mae and Freddie Mac to raise their guarantee fees by at least 12.5 basis points while allowing the director of the Federal Housing Finance Agency to determine the details. The higher fees would raise $38.1 billion, according to Casey’s summary.

House Republicans plan to propose legislation in coming days that would extend the 4.2 percent payroll tax rate for one year for employees. House lawmakers will seek to avoid cuts to physician reimbursements by Medicare and address expanded unemployment benefits that are set to expire at the end of the year. The Republican plan also is expected to include language expediting construction of the Keystone XL pipeline from Canada as well as an Environmental Protection Agency proposal to limit emissions for industrial boilers.

Romney Backs Extension

On the Republican presidential campaign trail, former Massachusetts governor Mitt Romney told a radio talk show yesterday that he supports a one-year extension, marking a shift from October when he appeared to reject the idea.

‘‘I would like to see the payroll tax cut extended just because I know that working families are really feeling the pinch right now,” Romney said yesterday on Michael Medved’s radio show. “Middle-class Americans are having a hard time.”

At an Oct. 10 Republican presidential debate hosted by Bloomberg LP and the Washington Post in Hanover, New Hampshire, Romney had said he didn’t want “temporary little Band-Aids” for the tax code. “I want to fundamentally restructure America’s foundation economically,” he said then.

Another contender for the Republican nomination, former House Speaker Newt Gingrich, has consistently supported continuation of the payroll tax cut.

“I am against tax increases in the middle of a depression,” Gingrich told Bloomberg Television in September. “We should extend tax cuts for working Americans just as I would extend the Bush tax cuts” for the wealthiest taxpayers.

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