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Payroll Tax Holiday Impasse Broken; Action Expected by Christmas

By Jonathan Nicholson, Brett Ferguson and Cheryl Bolen
Publication Date: 12/23/2011

House and Senate leaders agreed Dec. 22 to break the logjam over temporarily extending the payroll tax holiday and other policies for another two months, and House Speaker John Boehner (R-Ohio) said he expects the deal to be passed as soon as Dec. 23.

Democrats portrayed the agreement as a political victory, even though it would set the stage for another conflict over the issue in two months. Under the agreement, Senate Majority Leader Harry Reid (D-Nev.) agreed to name conferees to a conference committee on H.R. 3630, and Republicans received a sought-after change in the language on withholding taxes for high-earners in return for agreeing to pass the compromise through the House.

Rep. Dave Camp (R-Mich.), chairman of the House Ways and Means Committee, said he will introduce a new bill incorporating the change Dec. 23, and Boehner said he will seek unanimous consent agreements to pass the bill on the House floor and in the Senate by Christmas. The House was already scheduled to hold a pro forma session—where no business is transacted—Dec. 23, and the new bill is expected be brought up then.

At a news conference, Boehner said he will call the House back into session the week of Dec. 26 to pass the bill if he is unable to get unanimous consent on the House floor.

‘Reenacting the Alamo,’ Brady Says

One Democratic aide described the agreement as “same bill, same duration, same tax cut” with the addition of the withholding change. The agreement includes a provision forcing the Obama administration to make a decision on construction of the Keystone XL pipeline, a concession the White House and Democrats made originally to win House Republican support.

Boehner, who was under pressure from some members of his party for not negotiating a full-year extension like the version of the bill originally sent to the Senate, acknowledged the politics of the fight did not look good for Republicans.

“It may not be the smartest political thing in the world, but our members fought the good fight,” Boehner told reporters. Boehner said he is proud of the work that his members put in on the House bill and said Republicans wanted to send the message: “No more gimmicks. No more short-term policy. It's time to do things the right way.”

Rep. Kevin Brady (R-Texas) echoed Boehner's sentiment.

“I'm disappointed because I still believe a full-year extension with unemployment reforms and spending cuts is the right policy for families, doctors, and small businesses. I am willing to fight on but in the end House Republicans felt like they were reenacting the Alamo, with no reinforcements and our friends shooting at us,” he said.

Obama Urges Continued Work

Earlier in the day, Sen. Mitch McConnell (R-Ky.) signaled his support for compromise, saying the two-month extension and negotiating a full-year extension were not “mutually exclusive.” After the agreement was reached, McConnell said, “With today's agreement between the Speaker and Leader Reid, working Americans can breathe a sigh of relief knowing that their taxes will not go up at the end of the year and that the President will have to finally decide on whether to move forward on a pipeline project that would create thousands of American jobs.”

President Obama, in a statement issued after the deal was announced, congratulated lawmakers on breaking what he called a “partisan stalemate.”

“Because of this agreement, every working American will keep his or her tax cut—about $1,000 for the average family. That's about $40 in every paycheck. Vital unemployment insurance will continue for millions of Americans who are looking for work. And when Congress returns, I urge them to keep working to reach an agreement that will extend this tax cut and unemployment insurance for all of 2012 without drama or delay,” he said.

Earlier in the day, Obama had continued to put pressure on GOP leaders to reach a compromise, blaming the stalemate on a minority of the House Republicans.

“So far, the only reason it hasn't landed on my desk, the only reason, is because a faction of House Republicans have refused to support this compromise,” Obama said before the deal was struck.

‘Critical Flaw’ Fixed, GOP Says

Republicans focused on the inclusion of language on the Keystone pipeline and withholding changes, which they said would help small businesses.

“The new House bill corrects this critical flaw in the Senate provision by allowing employers to withhold employee payroll taxes at the reduced rate (4.2 percent) on all wages paid during the two-month period, subject only to the full 2012 wage base ($110,100) and without regard to the new $18,350 cap on wages earned through the end of February,” according to a Camp spokesman.

“If an employee's wages during the first two months of 2012 exceed $18,350 (two-twelfths of the wage base of $110,100), an amount equal to 2 percent of those excess wages would ultimately be recaptured on the worker's individual tax return for 2012. However, this rule would only apply if the payroll tax reduction is not extended for the remainder of 2012, and a conference committee is expected to convene soon in order to negotiate a full-year extension,” the spokeswoman said.

Senators put the taxable wage limit in the bill to ensure that very high-income individuals are not able to collect a full year's worth of tax savings in their first few paychecks of the year, while lower-income households will only collect two months worth of tax savings.

The complete text of this article can be found in the BNA Daily Tax Report, December 23 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.