Payroll-tax cut not dead yet. Can the House save it?

The defeat of dueling Senate plans to extend the payroll-tax cut set off shock waves in the GOP-controlled House, where Republicans met behind closed doors Friday in search of common ground on this and other popular measures, set to expire Dec. 31.

The stunner in Thursday’s Senate vote is that 26 Republicans – more than half the GOP caucus – voted with Democrats to derail their own GOP plan on an issue likely to be central in the 2012 campaign.

In the high-pressure, last days of any session of Congress, it falls to the leaders to work out a plan to wrap up such must-pass legislation. Bipartisan deals are cut. The rank and file, often reluctantly, falls in line. Then, Congress breaks for the holidays and returns in January.

But with the defeat of both Senate plans, the buck passes to House Republicans. And Speaker John Boehner is having to dig deep to rally a Republican caucus that is sharply divided over how aggressively to cut deficits and spending, even when faced with measures viewed as must-pass.

On Friday, Speaker Boehner met with caucus members over a proposed leadership plan to extend popular measures about to expire and how to pay for it.

The case for the leadership plan was that “we’ve got to do something, and if you think we can get by without doing it, you’re crazy,” said Rep. Jeff Flake (R) of Arizona, after the meeting.

“There’s frustration in here that we were put in the position we’re in,” he added. “We’ll be in this position again next year and the year after and the year after, and until we have the courage to address entitlement reform, we shouldn’t be doing this.”

In the waning days of 2011, GOP conservative backbenchers are getting more assertive. On Nov. 17, 101 House Republicans broke with GOP leaders to oppose a package of three fiscal 2012 spending bills, which until that point had been viewed as relatively noncontroversial. These conservatives, mainly members of the Republican Study Committee, said that the bills proposed too much spending.

In Thursday’s Senate votes, GOP naysayers drew a similar line on government spending. They see the payroll-tax cut as just another instance of excessive government “stimulus” spending – unlikely to create jobs, sure to pile up deficits. Breaking ranks, they opposed a $120 billion proposal by Senate Republican leader Mitch McConnell to extend those tax breaks, to be paid for by cutting the federal workforce and raising Medicare premiums for taxpayers with incomes over $1 million.

The vote on the McConnell proposal was 20 to 78.

All but one Republican, Sen. Susan Collins of Maine, also opposed the Democrats’ $250 billion plan to expand the payroll-tax cut for employees and offer a comparable cut to employers, paid for by raising taxes on incomes over $1 million. The measure failed, 51 to 49. Two centrist Democrats, Sen. Joe Manchin of West Virginia and Jon Tester of Montana, opposed the Democratic plan. (Sixty votes are required to pass major legislation in the Senate.)

Now, after those votes, House Republicans are working on a plan to reach a grand bargain on the payroll tax as well as other popular tax cuts about to expire.

Unless Congress acts, the payroll tax reverts back to taking a 6 percent bite out of every employee paycheck after Dec. 31. Also on Dec. 31, federal support for extended unemployment benefits expires – a move that could cut off benefits for unemployed workers at 26 weeks, instead of the 99 weeks provided in current law.

Moreover, doctors that accept Medicare patients will see a 27 percent pay cut as of Jan. 1, unless Congress acts. For the past eight years, Congress has passed the so-called doc fix, typically at the 11th hour.

House GOP leaders are proposing a package that combines extending the payroll-tax cut and unemployment benefits and possibly includes at least a partial doc fix, according to lawmakers who attended Friday’s meeting. These would be paid for by spending cuts over the next 10 years.

Some conservatives exiting the meeting said they doubted that the spending cuts would be sustained over a decade. Others said they favored putting more money in taxpayers’ pockets, but opposed taking it from the payroll tax, which is the funding stream for Social Security.

"We continue to spend too much,” said Rep. Jeff Landry (R) of Louisiana. “We’re moving in the wrong direction.” The freshman lawmaker, who broke with leadership in the spending vote on Nov. 17, says that he will have “no problem” explaining his nay votes to constituents back home.

“I am comfortable with people keeping their own money, but I am not comfortable with robbing Social Security,” said freshman Rep. Mick Mulvaney (R) of South Carolina. Instead of extending the payroll-tax “holiday,” he says he favors finding corresponding reductions in marginal tax rates.

The political risk is that Republicans who oppose extending the payroll-tax cuts are gearing up to defend extending Bush-era tax cuts, without offsets. These cuts are set to expire on Dec. 31, 2012, and include tax breaks for the highest-income Americans.

Meanwhile, in recent days President Obama has turned the payroll-tax-cut extension into a key campaign talking point. Republicans, he says, oppose extending tax breaks for struggling workers, while insisting on preserving them for millionaires.

“A predictable clash is emerging between the ideological zeal of Republicans who have tried to push the party to the right and GOP leaders, who realize that voting against the payroll-tax holiday opens Republicans up to attack in a way that few other issues do,” says Julian Zelizer, a congressional historian at Princeton University in New Jersey.

Boehner said at a press briefing Friday that he expects to release the House GOP plan next week. Asked if he expects to see the same “resistance and division” in House GOP ranks as appeared in Thursday’s Senate vote, he said: “I would hope not.”