In surprise move, GOP leaders admit defeat in payroll tax battle

House GOP leaders had wanted to offset the cost of a payroll tax extension by spending cuts. But their decision Monday suggests that the political cost of a stalemate was too high.

In a surprise move, House Republican leaders on Monday backed off their demands in the battle over extending a payroll tax cut that affects some 160 million Americans.

The move, which would keep payroll taxes at their current 4.2 percent rate through 2012, is expected to add another $83 billion to federal budget deficits. Republicans had wanted to offset that amount through spending cuts.

The House GOP has not given up its fight entirely. Other provisions set to expire Feb. 29 – extended unemployment insurance and a “fix” for a 27 percent mandated cut in reimbursement rates for doctors treating Medicare patients – remain stalled, especially over how to pay for them.

But had Republicans not yielded on the popular payroll tax break, the political costs could have been formidable, especially in an election year. 

“It’s a total capitulation,” says Stan Collender, a longtime congressional budget analyst, now with Qorvis Communications in Washington. House Speaker John “Boehner read the tea leaves and said, ‘I’m not going to do this again.’ ”

House Republicans took a pounding in the polls last December, as a struggle over how to pay for extending benefits was resolved at the 11th hour only after Speaker Boehner told his deeply divided caucus, in a conference call, that they had no option but to accept a two-month extension of the popular tax break – until Feb. 29 – and continue negotiations.

With most of the House already back in their home districts, the measure passed by unanimous consent.

Monday's decision by top GOP leaders to change course on the payroll tax issue still has to be sold to the House GOP caucus, which has held out for spending cuts to offset the full $160 billion package to extend the payroll tax, unemployment insurance, and "doc fix."

House GOP leader say they may schedule the payroll tax measure for a House vote later this week, “pending a conversation with our members.”

For many House conservatives, the payroll tax holiday is not, in fact, a tax cut, because the cost to the Social Security trust fund is to be fully offset by general fund tax dollars – or, given $1 trillion-plus deficits – by further borrowing.

But it is not clear how many will buck their own leadership on this issue. To Americans making $50,000 a year, a $20-a-week increase in money taken out of their paychecks will look like a tax hike – a move at odds with the GOP pledge to cut taxes.

“There is still the very real issue that we’re either taking money from the Treasury to shore up Social Security or we’re denying revenue to a program that’s going to put it in a more difficult position,” says Steve Ellis, vice president for Taxpayers for Common Sense.

But he adds that it’s a smart political maneuver for House Republicans, because it defuses the argument that they are opposing a tax cut. “I’m not saying it’s responsible budgeting, but it’s not bad politics,” he adds.

In the weeks of negotiations since December, both sides before Monday had appeared to be locked into nearly the same positions they were last year. Democrats still proposed paying for extending the payroll tax break by hiking taxes on incomes over $1 million – a nonstarter for Republicans committed to no tax hikes.

“This is not our first choice,” said Speaker Boehner, majority leader Eric Cantor of Virginia and majority whip Kevin McCarthy of California, in a joint statement on Monday. “In the face of the Democrats’ stonewalling and obstructionism, we are prepared to act to protect small businesses and our economy from the consequences of Washington Democrats’ political games.”

While applauding the GOP reversal on the payroll tax, the White House and Democratic leaders are urging completing negotiations on the entire package, including unemployment insurance and the Medicare doc fix.

“The Republican plan to decouple the payroll tax jeopardizes both the ability of seniors to see their Medicare doctors and benefits for millions of Americans who lost their jobs,” said House minority leader Nancy Pelosi (D) of California.  “There is no reason all three of these priorities cannot proceed at the same time as both the House and Senate agreed."