Federal government shutdown looms amid payroll tax standoff

A partisan standoff in Congress over President Obama’s payroll tax cut for 160 million working Americans threatens to shut down the federal government as early as this weekend, leaving lawmakers to finish the year careening toward yet another budget crisis.

A must-pass bill to keep the government running has become tangled in the politics of continuing the payroll tax break, which shaves workers’ Social Security tax from 6.2% to 4.2%. If the tax cut is allowed to lapse after Dec. 31, workers would have to pay an extra $1,000 a year, on average.

Senate Majority Leader Harry Reid (D-Nev.) and other Democrats met with Obama on Wednesday at the White House as House Speaker John A. Boehner (R-Ohio) convened rank-and-file Republicans behind closed doors. Later, Reid met with Boehner and the top Republican in the Senate, Mitch McConnell of Kentucky.

Democrats are considering dropping their plan to impose a surtax on people earning $1 million or more a year to pay for the payroll tax holiday — a concession that had been considered likely. Republicans had rejected the proposal, so if Democrats retreat, the contours of a compromise could begin to emerge. The GOP wants the $120-billion cost of the payroll tax break to be covered mainly by cuts, including reducing unemployment benefits and freezing federal workers’ pay.

An aide familiar with the White House talks said the surtax on the wealthy was up in the air. “It’s being discussed,” the aide said.

The stalemate hardened this week as the GOP-led House approved a package that keeps the payroll tax holiday for 2012, but loaded the bill with Republican priorities, including a provision to allow drug tests for recipients of unemployment benefits and another to roll back clean-air standards for industrial boilers that emit mercury.

Those provisions make the bill dead on arrival in the Senate, where Democrats hold the majority.

Boehner tacked extras onto the bill to gain support from resistant Republicans, who dispute mainstream economists’ assurances that the payroll tax break stimulates the economy. Conservatives also doubt that losses in the Social Security trust fund will be replenished with offsetting money.

To apply leverage and prevent the House from heading home for the holidays, Democrats are stalling an unrelated spending bill to keep the government running. They say it contains unresolved side issues.

Federal workers are preparing for a shutdown, saying they would have to go without pay over the holidays. Boehner is seeking to avoid blame by pushing a version of the funding bill through the House by Friday, when most government offices would run out of money.

But negotiations over the payroll tax compromise have far to go. One of the add-ons, a provision to accelerate development of the controversial Keystone XL oil pipeline, has been singled out by Obama as a reason to reject the bill — although the White House declined to mention the pipeline in its most recent veto message, a signal that the administration may be loosening its position.

Republicans view the pipeline from Canada to the Gulf of Mexico as a “jobs creator,” but critics say it will increase the nation’s carbon footprint and pollution. Obama had shelved a decision until after the 2012 election.

lisa.mascaro@latimes.com