How payroll tax gridlock in Congress finally came unstuck

A deal to prolong the payroll tax cut has also paved the way for Congress to extend long-term unemployment benefits and the Medicare 'doc fix' to the end of the year. 

By , Staff writer

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    Senate Finance Committee Chairman Sen. Max Baucus (l.) reaches out to Rep. Fred Upton (r.) on Capitol Hill in Washington, Thursday, to celebrate as members of the bi-partisan House and Senate conferees on the payroll tax cut extension signed the compromise agreement.
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A surprise shift by House Republicans to extend a payroll tax cut – without requiring offsetting spending cuts – broke an impasse over two other measures now set for votes in the House and Senate on Friday.

If Congress passes and the president signs this package into law, as expected:

  • Americans will no longer see a 2 percent hike in payroll taxes.
  • Doctors serving Medicare patients will no longer face a 27 percent drop in reimbursement.
  • Long-term jobless workers won’t immediately lose their extended benefits.

All the provisions were set to expire on Feb. 29. In a bid to pay for these features, the unemployed will be eligible for fewer weeks of benefits, beginning in June. Some will face new requirements, such as drug testing, to access them. And new federal hires will be required to pay more for their pensions than current federal workers. 

Recommended: Why 'temporary' tax cuts never die: Payroll tax and 3 other examples

Until Monday, House Republicans had demanded offsets for the $100 billion cost of extending the 2 percent cut in the Social Security payroll tax, from 6.2 percent to 4.2 percent. They said that the payroll tax holiday was not, in fact, a tax cut, because it relied on taxpayer dollars to make up for the uncollected revenues in the Social Security trust fund.

But in the end, the political pressure on House GOP leaders to avoid what would seem to be a tax hike was simply too high.

“The agreement that’s been reached to stop a tax hike on middle class Americans is a fair agreement and one that I support,” said Speaker John Boehner (R) of Ohio, in a briefing with reporters on Thursday.

“But let’s be honest,” he added. “This is an economic-relief package, not a bill that’s going to grow the economy and create jobs.”

Some Democrats agree that the tax cuts should have been offset by revenues. They want the Bush tax cuts, which expire Dec. 31, to be offset and see a bad precedent in the current deal. 

“By taking this action, we’re saying that tax cuts somehow don’t have to be paid for,” said Sen. Mark Warner (D) of Virginia in a floor speech on Thursday. “We’re advancing a policy that I believe will come back to haunt us later this year when the Bush tax cuts expire.”

Other Democrats are mounting an 11th-hour protest against extending the Social Security payroll tax cut, saying it undermines Social Security. The deal mandates that revenue not collected by the Social Security Trust Fund through the payroll tax be replaced out of taxpayer dollars in the US Treasury's General Fund. 

“It creates a dangerous precedent by calling into question Social Security’s dedicated funding,” said Sen. Tom Harkin (D) of Iowa, who chairs the Senate Health, Education, Labor, and Pensions committee, in a floor speech late on Thursday. “Now, we can no longer say that Social Security doesn’t contribute to the deficit.”

“This is the beginning of the end of the sanctity of Social Security,” he added. "I never thought I would live to see the day when a Democratic president and a Democratic vice president put Social Security in this kind of jeopardy.”

The bipartisan deal on extending unemployment insurance riled other Democrats because it rolled back the number of weeks of eligibility from 99 weeks through May to 79 over the summer and to 73 in September. States with high unemployment rates are allowed a higher cap on jobless benefits.

Democrats defeated a GOP proposal to require unemployment recipients to have a high school diploma or be in a GED program, which they dubbed a new barrier to benefits. With 160,000 people on a waiting list for adult education, Democrats argued that that provision was unfair and unworkable.

Republicans also urged authorizing states to require drug tests of jobless applicants. In the bipartisan deal, such testing would be limited to only those losing their jobs because of illegal use of drugs or those applying for jobs that “generally require a drug test as regulated by the Secretary of Labor.”

“Republicans are bragging about the drug provision, and I think they should be apologizing,” said Rep. Sander Levin (D) of Michigan, a negotiator for House Democrats.

A final sticking point in the deal involved objections by Senate Democrats to a mandate that new federal hires contribute more to pension plans. House Republicans proposed offsetting the costs of extending unemployment insurance with a one-year pay freeze for federal workers and increased contributions to federal pensions.

In the end, the compromise fell short of that.

“It only affects new hires at a level that is lower than was in the House bill,” says Sen. Benjamin Cardin (D) of Maryland, whose state is home to many federal workers. “I’m disappointed by that, but we did protect current workers who came to the federal workforce with certain expectations and those expectations will be respected.”

“We’re going to be fighting very hard to stop the attacks that will be coming from the House,” he added.

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