Congress prepares for payroll tax battle

The congressional “super committee” officially admitted failure, but even as it did so, Congress plunged toward a new budget battle that carried an immediate punch: A year-end fight could bring a tax increase of nearly $1,000 to the average American worker.

The current payroll tax holiday for workers expires Dec. 31, and unemployment benefits run out for some 2 million Americans shortly after that. Economists warn that a tax increase on Jan. 1 combined with an end to the jobless benefits could cut the economy’s already weak growth almost in half.

Many members of Congress had hoped that the super committee, which was trying to produce a $1.5-trillion deficit reduction plan, could include an extension of the payroll tax holiday in whatever deal it reached. Those hopes came to an end Monday when the committee’s co-leaders issued a statement, after the financial markets had closed for the day, that conceded defeat in their three-month effort to craft a budget-cutting plan.

“We have come to the conclusion today that it will not be possible to make any bipartisan agreement available to the public before the committee’s deadline” on Wednesday, Sen. Patty Murray (D-Wash.) and Rep. Jeb Hensarling (R-Texas) said in the statement.

Predictably, each party blamed the other, with Democrats saying that Republicans had refused to budge on raising taxes for the wealthiest Americans and Republicans accusing President Obama of weak leadership.

Obama, in a statement at the White House, said the long-term deficit would still decline because the committee’s failure automatically triggered spending cuts in domestic and defense programs starting in 2013. Some members of Congress have talked about blocking those cuts, but Obama promised to “veto any effort” to do that. “There will be no easy offramps on this one,” he said.

“The only way the cuts will not take place,” he said, “is if Congress gets back to work” and comes up with a better plan. His remarks seemed aimed, in part, at reassuring investors after a day in which the markets dropped but major ratings agencies said they would not change their assessment of the U.S. government’s credit.

The president also pressed Congress to continue the payroll tax reduction.

“We’ve got a lot of work left to do this year,” Obama said. “If we don’t act, taxes will go up for every single American starting next year. And I’m not about to let that happen. Middle-class Americans can’t afford to lose $1,000 next year because Congress won’t act.”

In the past, proposals to provide the payroll tax break and extend jobless benefits have been politically popular. But nothing is easy these days in deeply divided Washington.

“We’re now back in the free-fire zone,” said Rep. Peter Welch (D-Vt.). “It’s going to be basically like cage fighting in Congress because we haven’t been able to achieve agreement.”

“I think a lot of people were hoping this would solve their problems and they could have a good Thanksgiving and a good Christmas,” said Sen. Jeff Sessions of Alabama, the ranking Republican on the Senate Budget Committee. “Not so.”

Democrats say the economy needs both the payroll tax cut and the extended benefits, even though such moves would add to the national debt. They echo mainstream economists who advise Congress that targeted spending is needed to spur economic growth now, and cuts should come later.

Republicans, who have focused all year on cuts in spending, are balking at the cost — more than $250 billion when other routine tax extensions are included. The last thing the GOP wants is to increase the national debt after a year of attacking any proposal that would add to it.

The political challenge for congressional leaders in the weeks ahead will be one that they have wrestled with most of the year in one budget battle after another — devising a way to pay for the proposals that will satisfy budget-cutting Republicans but won’t chase away Democrats, who are certain to oppose deep reductions to domestic programs.

Democrats point out that in the past, jobless benefits have always been extended when the unemployment rate is high, as it is now at 9%. The federal program extends unemployment insurance for up to 99 weeks, beyond the 26 weeks of benefits offered by most states.

Obama originally wanted not just to extend the payroll tax holiday but to expand it. That plan, included in his proposed jobs package, now seems politically impossible.

The existing payroll tax holiday reduces the tax that workers pay, providing a tax cut capped at $2,000 this year for employees’ paychecks. It was first approved in late 2010 as part of a deal to continue tax breaks for the wealthy and others from the George W. Bush administration. Its expiration would mean an immediate tax increase.

Congressional leaders have been strategizing about the weeks ahead. One approach would be to attach the payroll tax break and the unemployment insurance extension to a year-end bill that will be needed to keep the government running through 2012. But House Speaker John A. Boehner (R-Ohio) has faced increasing difficulty in getting his rank-and-file to vote to fund the government, and such a proposal would probably need Democratic votes to pass.

lisa.mascaro@latimes.com