Payroll tax debate dominates Capitol Hill agenda this week

Congress will attempt to approve a payroll tax holiday this week, with Democrats and Republicans offering competing proposals that are likely to fail as both sides inch toward the year-end deadline for a compromise.

At issue is how to pay for the $112-billion cost of the tax break, which expires Dec. 31, even though rank-and-file Republicans are divided over whether the tax holiday should be continued into 2012. President Obama is campaigning for its passage, and failure to extend the payroll tax break would result in an average $1,000 tax hike on American workers in the new year.

Senate Majority Leader Harry Reid (D-Nev.) is expected to offer a new proposal, possibly Monday, after the GOP rejected a Democratic measure last week. Reid has promised to keep putting the proposals to a vote until it passes.

At the same time, House Speaker John A. Boehner (R-Ohio) is expected to present a GOP option to his rank-and-file lawmakers that would pay for the tax break with various federal budget cuts.

Facing a revolt from GOP ranks, Boehner hopes to entice lawmakers by linking the tax break to development of the controversial Keystone XL oil pipeline – making passage of one contingent on approval of the other.

Obama has shelved the oil pipeline project until after the 2012 election. Republicans say it would create jobs, but critics worry about environmental problems from extraction. The issue may divide Democrats, giving Republicans a wedge to pick up needed votes.

Boehner is also trying to wrap the payroll tax holiday extension into a broader bill that would include a continuation of unemployment benefits and routine tax breaks that also expire at year’s end.

Both sides are angling for the political advantage as the deadline looms for approving the tax break extension.

Two attempts to pass the payroll holiday last week drew widespread resistance from the GOP. Republicans in the Senate shot down a proposal to pay for an enhanced tax break with a surtax on those earning beyond $1 million a year. The GOP also shot down the Republican proposal to pay for the tax break with budget cuts and by asking the wealthy to pay more for Medicare.

Obama has made the payroll tax holiday a key flank in his jobs agenda, but the GOP resistance to the tax break comes for a variety of reasons. Republicans say the tax holiday has not helped stimulate the economy and is pulling revenue from the Social Security trust fund.

Economists say the tax break provides a boost to the sluggish economy by putting money into the hands of those who will spend it, and failure to extend the tax break could shave 1 percentage point off the nation’s growth next year.

While the tax break limits the revenue stream to Social Security by trimming the tax workers pay into the retirement fund, that money would be replenished by the revenue that comes from offsetting the tax break – likely budget cuts elsewhere.

Congress is also working on legislation that would keep the government running past Dec. 16, when the current federal spending bill expires.

The House is taking up more in its ongoing series of deregulation bills. The GOP has made the rollback of environmental and labor regulations the cornerstone of its jobs agenda, arguing that stopping such regulations creates jobs.

Economists and the nonpartisan Congressional Budget Office say revamping some regulations can help ease job creation in the future, but is not likely to have an immediate effect on 2012 economic growth.

The Senate is expected to consider various nominations this week to federal positions.