Democrats signaled that they would not acquiesce to Republican demands for poison-pill policy changes as a condition for passing an extension of the payroll tax cut, and that they would keep Congress in session through the holidays if they didn’t get the extension done.

First, Nancy Pelosi spoke about riders to Brian Beutler. Republicans have readied a series of spending rescissions and policy shifts that they will try to extract in exchange for their votes on the payroll tax cut, even while stating in public that they support the policy. Pelosi claimed that wouldn’t fly.

“It is really a stalling tactic,” Pelosi said of recent reports that Republicans want to use the lapsing tax cut as leverage to pass key GOP priorities, including construction of a major oil pipeline from the Canadian border to the Gulf of Mexico, and rolling back Obama’s health care law. “It’s unworthy of the needs of the American people for them to go all around the mulberry bush with this stuff. If they want to do something for the American people — to remove the uncertainty as to whether these payroll tax cuts will be extended, whether [unemployment insurance] will be extended … let’s just get about doing it.”

“They know that this stuff isn’t going to fly, that the President’s not going to sign it — so why are they doing this,” Pelosi says. “It’s about votes at the end of the day, and some of their people are never going to vote for anything, so they’re going to need our votes, we’re going to have to work together, and they’re going to need the President’s signature — and they’re going to need it to pass the Senate.”

This is the key point from Pelosi, that Democratic votes will be needed to pass anything, which gives her a voice in the process. A meeting last night in the House GOP caucus showed clearly that there is a major rift between the rank and file and the House leadership on the issue. Lots of Republicans just don’t want to do the tax cut at all. That gives Pelosi an opportunity.

And she’s on board with using war savings, with a capping of the overseas contingency operations (OCO) budget, to offset the tax cuts. As Pelosi says, you could use an OCO cap (a budget quirk caused by how war spending is scored
based on the previous year’s funding) to pay for the payroll tax, a patch to the alternative minimum tax, and the doc fix to avoid Medicare reimbursement cuts, and still have hundreds of billions of dollars leftover. She added that extending unemployment insurance, which has never been paid for before, shouldn’t be paid for now.

That pot of money is going to be very attractive, because while it’s an accounting gimmick it represents scoreable savings that are a far better offset than spending cuts or even tax increases. Republicans have resisted this but they used an OCO cap in their own budget.

Meanwhile, the President threatened to hold Congress in session over Christmas if no payroll tax legislation arrived on his desk:

Mr. Obama, during an appearance on Friday with former President Bill Clinton to promote energy efficiency in buildings, suggested that Congress should delay its holiday adjournment if the payroll tax cut impasse was not resolved.

“I expect that it’s going to get done before Congress leaves,” Mr. Obama said. “Otherwise Congress may not be leaving, and we can all spend Christmas here together.”

Dan Pfeiffer also tweaked Republicans today on the White House blog with past GOP statements of support for a payroll tax cut.

I think this will proceed with Republicans in the House finding some version of the payroll tax they can live with, something littered with special interest goodies or right-wing policy measures. It will either barely pass or just fail. Then there will be a lot of finger-pointing, as the Senate keeps throwing up payroll tax ideas that Senate Republicans block. By this point we’ll get to the December 16 deadline for a bill to fund government operations, which will have the same dynamic, with Republicans wanting to add policy riders or offset disaster relief spending. Then you might see a kitchen-sink bill with all of these disparate elements. Or, maybe you won’t, and the payroll tax will return to its historical rate, providing a fiscal drag on the economy, as well as a lot of blame-gaming.

UPDATE: In addition to this, the President has planned a speech on Tuesday, December 6, in Osawatomie, Kansas (site of where Teddy Roosevelt made his speech on the New Nationalism in 1910) about the economy. From the release:

The President will talk about how he sees this as a make-or-break moment for the middle class and all those working to join it.  He’ll lay out the choice we face between a country in which too few do well while too many struggle to get by, and one where we’re all in it together – where everyone engages in fair play, everyone does their fair share, and everyone gets a fair shot.

This could have a limited impact on the debate. Incidentally, Osawatomie is the speech where Teddy Roosevelt backed universal health care, something like Social Security and a progressive income tax. It also included this line: “To destroy this invisible Government, to dissolve the unholy alliance between corrupt business and corrupt politics is the first task of the statesmanship of the day.”