Obama’s proposed tax cut a quandary for GOP

The payroll tax cut that is the largest single element of President Obama’s new jobs plan has quickly created a political problem for congressional Republicans, who find themselves divided about how to respond.

Republicans love tax breaks and consider them a pillar of their philosophy, but conservatives never much liked the one-year payroll tax “holiday” for employees when it was enacted in 2010.

At the time, the cut in payroll taxes was part of a deal to extend the tax breaks for the wealthy first approved under President George W. Bush. It was added to lure Democrats’ votes, but conservatives argued that it would cost more than it was worth.

Now, with Obama proposing not only to extend the average $1,000 payroll tax break for another year but to increase it by more than 50%, many conservative Republicans are promising to resist. They say the $175-billion cost of the tax cut would unnecessarily expand the federal debt, and they are skeptical of administration claims — backed by many private economists — that the move would increase jobs.

House Speaker John A. Boehner (R-Ohio) and Majority Leader Eric Cantor (R-Va.), by contrast, have begun to open the door to compromise with Obama on the issue. Republican leaders fear the political consequences if the GOP comes to be seen as supporting tax breaks for everyone except average workers.

Obama is doing his best to stoke that worry. A day after he unveiled his jobs package in a speech to Congress, the president went on the road Friday, traveling to Cantor’s home turf in Richmond, Va., to urge voters to build grass-roots momentum behind his $447-billion jobs proposal.

Speaking before a friendly crowd in the University of Richmond’s basketball arena, Obama challenged Republicans to “prove you will fight as hard for tax cuts for workers and middle-class people as you do for oil companies and rich folks.”

“Pass this bill! Let’s get something done!”

Because the current payroll tax holiday expires at the end of the year, it has a potent political force. If Congress fails to extend the cut, virtually all workers will see a tax increase come Jan. 1 that would average $1,000. That not only could be politically unpopular, but might create a drag on the economy.

“Pretty hard for Republicans to vote against that,” said veteran Republican Rep. Mike Simpson of Idaho. “At this time, do you really want to raise taxes?”

But not all tax breaks are created equal. Many Republicans, particularly conservatives, would prefer to lower taxes on corporations, cut capital gains taxes or reduce income tax rates further for individuals. Cutting tax rates in those ways, they argue, would spur more economic growth.

The White House estimates that 160 million working Americans would see the tax break in their paychecks next year. The current credit provides a 2-percentage-point reduction on Social Security taxes, which workers pay on income up to $106,800.

Obama proposes to increase the tax break to 3.1%, which would mean an average tax savings for workers of about $1,500 in 2012.

Sen. Scott Brown of Massachusetts, who is up for reelection next fall, was among the few Republicans who stood and applauded when Obama announced the payroll tax plan.

On the other hand, Sen. Jeff Sessions of Alabama, the top Republican on the Senate Banking Committee, is among those who said he could not justify deficit spending for a payroll tax break.

“I’m more dubious today than I was,” Sessions said, citing the cost to the Treasury of the tax cut. “The debt is much larger now.”

Rep. Pete Sessions of Texas, who heads the House Republican campaign committee, called Obama’s plan “a horrible idea.” He said GOP candidates would have no difficulty explaining to voters why they want to let the tax break expire.

One of the arguments Republicans make against the tax break is that it drains Social Security revenue at a time when the trust fund is running short.

Normally, money from the payroll tax goes to fund Social Security. Under Obama’s plan, money would be transferred from the government’s general fund to cover the revenue losses to Social Security, but Republicans argue that is a dangerous game.

“This is robbing Peter to pay Paul,” said Rep. Tom Price (R-Ga.), a leading House conservative. “It’s a gimmick.”

Supporters of the administration argue that the best way to shore up Social Security’s finances is to improve the overall economy and get more people working.

Outside groups that advocate for Social Security are monitoring the debate. Nancy LeaMond, executive vice president of AARP, said Washington must ensure that extending the payroll tax break “will have no negative impact on Social Security in the short and long term.”

Economic experts warn that failing to extend the tax break would slow the economy by what Moody’s Analytics estimates would be a half-percentage point off gross domestic product.

“Our biggest concern was that they avoid a negative: If nothing is done, every paycheck in the country goes down on Jan. 1 at a very vulnerable moment for the economy,” said Chuck Marr, a tax expert at the Center on Budget and Policy Priorities.

“Now, everyone gets a pay increase.”

lisa.mascaro@latimes.com

peter.nicholas@latimes.com