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House GOP Set to Release Payroll Tax Extension Without AMT, Extenders

By Brett Ferguson, Steve Teske, and Cheryl Bolen
Publication Date: 12/06/2011

House Republican leaders are set to release their own version of legislation that would extend the existing payroll tax cuts for an additional year, as well as extend unemployment insurance benefits and prevent cuts to Medicare payments to physicians, lobbyists familiar with the legislation told BNA Dec. 5.

But the planned legislation is not likely to include an extension of the alternative minimum tax patch for 2012 or any of the more than $30 billion in expiring tax incentives that are part of the annual “extenders” package. The extenders package includes the research and development tax credit, deductions for state and local taxes, the subpart F active financing exemption, the biodiesel and ethanol tax credits, and the deduction for teachers buying classroom supplies.

The Republican plan would cost roughly $180 billion and likely be paid for through some combination of changes to pay and benefits for federal employees, higher Medicare premiums for high-income households, an increase in fees charged by Fannie Mae and Freddie Mac to mortgage lenders, and a prohibition on the issuance of Internal Revenue Service refund checks to individuals without a Social Security number.

Although lawmakers have not agreed on all of the potential offsets yet, they could also include a spectrum auction; the reform of certain Medigap plans; a reform of the federal flood insurance program; a prohibition on unemployment insurance, food stamps, and Medicare subsidies for millionaires; and changes that would better coordinate Social Security payments with states, lobbyists said.

For federal workers, the changes could come in the form of an extension of the pay freeze through 2015—an idea that Democrats quickly dismissed when Senate Republicans offered it in their bill (S. 1931)—as well as higher contributions to the federal employees retirement system.

The Republican bill is expected to include a two-year “doc fix” to keep payments to Medicare providers from falling, as well as a separate policy proposal that would give Federal Energy Regulatory Commission authority to approve the proposed Keystone XL oil pipeline from Canada to Texas.

The unemployment insurance extension is expected to be for 79 weeks, then fall to 59 weeks in the summer, lobbyists said.

Republican aides declined to comment on the legislation.

The House Republican plan differs greatly from the latest version being offered by Senate Democrats, but shares a few items in common, such as the curbs on unemployment benefits and food stamps for millionaires and the higher fees to be charged by government-sponsored enterprises like Fannie Mae and Freddie Mac.

Senate Democrats Scale Back Their Plan

Sen. Robert Casey (D-Pa.) and Senate Majority Leader Harry Reid (D-Nev.) floated a fresh proposal Dec. 5 that would cut payroll taxes to 3.1 percent on the employee side and pay for the change through a 1.9 percent surtax on millionaires, while abandoning efforts to expand the payroll tax cuts to the employer side.

Like the anticipated House bill, Sen. Robert Casey (D-Pa.) said the proposal would cost about $185 billion. That amount is down from the $265 billion that the previously rejected Democratic bill (S. 1917) would have cost.

The Casey bill would also sunset the surtax on income in excess of $1 million after 10 years in response to Republican complaints that the previous version of the bill would institute a permanent tax to pay for a one-year tax cut.

Like the House plan and earlier bill (S. 1931) offered by Senate Republicans, the plan would also prohibit millionaires from being eligible for unemployment compensation and food stamps, but it does not include means testing to participate in Medicare.

The amount Casey's bill would charge for GSE guarantees of mortgages would be determined administratively, but would not be less than an average increase of 12.5 basis points for each origination year or book year above the average fee imposed for such guarantees during 2011. The provision is expected to raise $38.1 billion, Casey said.

But many of the same problems that Republicans had with the earlier Democratic proposal—which fell nine votes shy of the 60 needed to limit debate and advance the bill—still exist under the revised plan.

Senate Minority Whip Jon Kyl (R-Ariz.) said in a Dec. 5 floor speech that Republicans are unlikely to support the proposal because of the surtax on millionaires, as well as concerns about the effectiveness of using a payroll tax holiday to stimulate the economy and possible long-term effects on the Social Security system.

Obama Pledges to Compromise

Across town, President Obama Dec. 5 said he will work with Republicans to pay for an extension of the payroll tax cut in a responsible way, which does not include additional deep spending cuts that would hurt the economy.

Many Republicans have sworn an oath never to raise taxes, Obama told reporters at the White House. “How can it be that the only time there's a catch is when it comes to raising taxes on middle-class families?” he asked.

Some Republicans, who have pushed back against extending this tax cut, have said it must be paid for, Obama said. “And I just point out that they haven't always felt that way. Over the last decade, they didn't feel the need to pay for massive tax cuts for the wealthiest Americans, which is one of the reasons that we face such large deficits,” he said.

Indeed, when Republicans took over the House at the beginning of this year, they explicitly changed the rules to state that tax cuts do not have to be paid for, Obama said. Having said that, the president said progress must be made on the deficit.

Big Cuts Already Being Made

Obama said he signed into law this summer nearly $1 trillion in spending cuts, and there is another $1 trillion in cuts in the pipeline. It would be irresponsible now to make additional deep cuts in areas such as education, innovation, or the basic safety net that are critical to the economy, he said.

“Nor are we going to undo the budget agreement that I signed just a few short months ago,” Obama said.

Separately, White House Press Secretary Jay Carney said the president broadly supports the revised payroll tax cut proposal offered by Senate Majority Leader Harry Reid (D-Nev.) and Sen. Robert Casey (D-Pa.).

The president believes that lawmakers must be mindful of the nation's fiscal issues, Carney said. “That's why he proposed the measure in the American Jobs Act to pay for all of it, including the payroll tax cut expansion and extension; why he supported the Senate Democratic version, the original one, which paid for it in an economically sensible and fair way; and why we support this latest proposal,” he said.

Tax Legislation Update: 2010-2011 Expiring Federal Tax Provisions

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The complete text of this article can be found in the BNA Daily Tax Report, December 6, 2011. For comprehensive coverage of taxation, pension, budget, and accounting issues, sign up for a free trial or subscribe to the BNA Daily Tax Report today. Learn more »

© 2011, The Bureau of National Affairs, Inc.