It looks like a blink. Senate Minority Leader Mitch McConnell told reporters yesterday that “I think at the end of the day there’s a lot of sentiment in our conference, clearly a majority sentiment, for continuing the payroll tax relief that we enacted a year ago in these tough times.”
That was a clear endorsement for a policy that Democrats, including the President, who is on the road today in Scranton, Pennsylvania echoing this message, have been hammering for weeks now. Republicans are apparently on board with the biggest fiscal measure that has been proposed in Washington, in terms of size. This would prevent a major fiscal drag in 2012 and markedly improve the economy. They did not want to be seen on the wrong side of broad tax relief for every American worker.
But if you think this is now as simple as banging a few gavels and rubber-stamping a few bills, think again. We are far from consensus on the contours of a payroll tax package, as McConnell made clear if you read his full remarks. And when the Senate votes Friday on the first incarnation of a payroll tax cut extension, despite McConnell’s words it will go down to defeat. Here are the major issues:
• The pay-for. It used to be an open question in Republican circles whether tax cuts had to be paid for at all. And in fact, some Republicans, like Scott Brown, don’t want it to be offset at all. But McConnell was explicit, in the very next sentence after his endorsement of extending the tax cut. “But we believe with this kind of deficit, we ought to pay for it.” And he most certainly doesn’t agree with the Senate Democratic proposal, which widens and deepens the payroll tax cut, and has a pay-for of a 3.25% surtax on millionaires, who make up just 0.1% of the population. McConnell predictably argued that this surtax would crush small businesses, which White House Council of Economic Advisers Chair Alan Krueger rebutted yesterday. “The vast majority — one figure I saw was 99 percent — of individuals with small business income would not be affected by this.”
McConnell instead vowed that Senate Republicans will come up with their own offset, and based on the offsets they have proposed in the past, expect it to be completely unacceptable, something on the order of drastically reducing near-term spending across the board.
So while Senate Republicans are predicting that their version of the bill will pass, the truth is that pay-fors have derailed plenty of bills in Washington, even if both sides want to pass the underlying policy. And the argument over the pay-for gives both sides a way to blame the other for a tax increase.
There are escape hatches here, particularly using a cap on war funding (known as the overseas contingency operations, or OCO, budget) from the expected drawdowns in Iraq and Afghanistan to recognize savings that can be used as an offset. But it’s unclear whether that’s a step both sides want to take. [cont’d]
• There are two chambers. The only people you heard so far on this proposal on the Republican side serve in the Senate. That makes sense because the Senate is poised to vote on this later in the week. But House Republicans have been basically silent on the payroll tax. Mitch McConnell does not dictate what the House GOP brings to the floor. That was evidenced by the debt limit debate, when McConnell floated an escape hatch through the resolution of disapproval process to pass the debt limit, and House Republican leaders summarily rejected it. Dave Camp, the Republican head of the House Ways and Means Committee, would only say that “I think we’re going to have a few days of really listening to our members,” when asked about the issue. McConnell isn’t speaking for them.
• The President’s role. President Obama has forcefully stepped into this debate, doing events around the country on the need to extend the payroll tax cut. He may give a national address on the issue. The history of this White House has been that, whenever the President jumps into an issue, his presence immediately polarizes it, and Republicans turn violently against it, even if it was their idea in the first place. In this case, Republicans are generally conceding the desire to extend the tax cut. But they still don’t want to hand the President a victory, especially one which could marginally improve the economy. That’s just not their scenario for victory in 2012.
Then there’s the risk of needing Presidential sign-off, given his deep involvement in the issue, in any compromise solution. Press Secretary Jay Carney would not say whether the White House would support a different pay-for than the millionaire’s surtax, for example. Further, the President’s views on an acceptable pay-for may not square with that of Democrats or Republicans. It adds one other cook into a broth that makes it harder to reach consensus.
• The Social Security question. There is a nagging sense in some liberal corners that the payroll tax, which funds Social Security, should not be cut, even if the Social Security Trust Fund is made whole by general revenue, because it invites meddling with Social Security down the road. Indeed, if you don’t return the payroll tax to its full rate in 2012, it becomes harder to do so down the road (it’s always a “tax increase,” in the Obama parlance, when it goes away). Then the general fund is picking up some of the Social Security costs, and Social Security is contributing to the deficit in a roundabout way, making it easier to argue that it needs to be “fixed” (i.e., have the benefits cut) in some way.
Krueger yesterday insisted that this is a temporary tax that will contribute to economic recovery, making it unnecessary to persist down the road. But the fear of what this does to Social Security may be enough to keep at least a handful of Democrats off an extension. And with votes likely to be at a premium for any compromise, it makes the needle that you need to thread that much smaller.
• Additional issues. Tom Curry runs down all the other urgent measures likely to get a vote before the end of the year. There are the appropriations to fund the government, extended unemployment benefits which run out at the end of next month, a doc fix to prevent a 29% cut to doctors on Medicare reimbursement, a host of expiring tax breaks for corporations and individuals, a patch on the alternative minimum tax, and more (like an FAA authorization extension). While putting all of these measures into a salad would theoretically make them easier to pass, with all the moving parts it can also make it MORE difficult, especially because almost everything in that kind of package would cost money.
In sum, there are all kinds of ways to screw this up and let the payroll tax cut expire, even if both parties presume to want to extend it.