'This is the right policy to consider,' Chris Van Hollen said. Dems seek edge on payroll tax

Democrats gunning for another year-end fight over the payroll tax cut say an extension isn’t just good economics — it’s also good politics.

Though a wide swath of their party loathes the nearly two-year old payroll tax cut — and even President Barack Obama has proposed ending it — many Democratic lawmakers, particularly in the House, are pressing their colleagues to keep the multibillion-dollar provision alive in the wide-ranging tangle of fiscal cliff negotiations awaiting Congress after the election.


A confluence of economic and strategic factors is at play. For one, leading Democrats pushing for an extension argue that a still-recovering economy may not be able to absorb the kind of blow that would result from cutting off the payroll tax holiday after Dec. 31. Allowing the break to lapse would shrink paychecks by 2 percentage points in January.

“If we’re going to be talking about these kinds of tax relief measures, we should focus on the one that helps 160 million Americans and would provide an economic boost,” Rep. Chris Van Hollen (D-Md.) told POLITICO.

But Democrats also say that the very act of fighting for an extension will provide their party a political boost in fiscal cliff talks, particularly since Republicans will be focused on the separate issue of extending the Bush-era upper-income tax rates.

“The contrast is very clear,” Van Hollen said. “This is the right policy to consider, and I think it’s also a useful message.”

Rep. Joe Crowley (D-N.Y.), who is also open to a payroll tax-cut extension, said pushing for an extension could make clear the difference between the GOP and Democrats when it comes to tax policy.

“Our perspective is, the Republicans have been talking consistently about giving the wealthiest a tax cut and I think what this does in reality, it is giving the middle class a tax cut,” said Crowley, a member of the tax-writing Ways and Means Committee. “So I think it shows the Democratic Caucus has been toward the middle class as opposed to the wealthiest.”

The payroll tax cut primarily benefits lower- and middle-income taxpayers because it is applied to only the first $110,000 of income.

“The payroll tax cut has provided an important and necessary boost to tens of millions of middle-class families,” said Rep. Sander Levin, the top Democrat on Ways and Means. “There’s certainly no reason to take an extension off the table in October.”

Still, the tax credit’s popularity is subject to debate, particularly since many people didn’t realize that their paychecks grew by 2 percent at the beginning of 2011. The White House has had to constantly remind taxpayers that they received a cut — something the George W. Bush administration didn’t have to do when it sent out lump-sum checks to Americans.

Other Democrats say their hand will be stronger if the party unites in insisting that no tax break — including the payroll tax cut or breaks for the middle class — be extended unless the Bush-era tax cuts on top earners expire.

“There’s no way that there isn’t pain involved one way or another, and I think if you don’t extend, there’s some pain involved,” Sen. Jay Rockefeller (D-W.Va.) told POLITICO. “But it sends a message to the Republicans that we’re not kidding around on this.”

Rockefeller said Democratic lawmakers hope to meet with President Barack Obama after the election to press for a hard-line stance.

Social Security is funded by the payroll tax paid by employers and workers. The program hasn’t technically been hurt by the payroll tax cut because the government transferred money into the trust fund from the general fund to cover revenue lost.

But advocates for keeping the payroll tax cut an option have powerful forces working against them.AARP, which says the tax cut erodes the basic premise of Social Security, is pressuring Congress to let the 2 percent holiday end, and liberal Democrats on Capitol Hill such as Iowa Sen. Tom Harkin say they will refuse to back an extension beyond Dec. 31.

Massachusetts Rep. Richard Neal, a senior Democrat on Ways and Means, said the party needs to refocus its energy on the long-term sustainability of Social Security.

“Standing on its own, I think we need to give consideration of what it does to the Social Security trust fund,” he said.

Still, Neal said he would consider voting for an extension if it is tied to a broader package.

“If it was part of a bigger deal, I’d look at it,” he said. “If it’s an enticement to get a bigger deal, I’d be understanding of people wanting to do that.”

The payroll tax cut is colliding with other tax and spending provisions that Congress must decide how to handle at the end of the year. Unless Congress acts, the Bush-era tax cuts will expire for everyone, $109 billion in spending cuts will take effect next year, emergency unemployment benefits will expire and the government will again near the debt ceiling.

President Obama’s fiscal 2013 budget would let the payroll tax cut expire, as scheduled, at the end of this year.

Yet with so much at play and little consensus among Democrats, the White House and party leaders on Capitol Hill are approaching the payroll tax cut with caution.

“On payroll, there are a number of tax issues that Congress will have to deal with at the end of the year, this being one of them and we will continue to evaluate all of the options available to us at that time,” White House spokeswoman Amy Brundage told POLITICO. “The very first thing Congress should do is extend the middle-class tax cuts.”

The White House is also downplaying reports that it is seeking alternatives to another payroll tax cut, such as reviving the Making Work Pay credit.

Nadeam Elshami, a spokesman for House Minority Leader Nancy Pelosi (D-Calif.), said the party “must come together and reach a long-term agreement.”

“In moving that process forward, those who have ideas, including an extension of a payroll tax cut, should put them on the table.”

The payroll tax cut went into effect on a one-year basis in January 2011. Since then, the question of whether to extend it has twice brought Congress to a near standstill.

For months, it seemed that the break was a goner, especially after Pelosi announced her opposition to another extension during a September roundtable with reporters. Republicans have said all year that they would oppose another continuation of the break.

But the provision gained new life after Larry Summers, the former director of President Barack Obama’s National Economic Council, said earlier this month that it was “not the right time” to let the payroll tax cut end.

“One hundred and twenty billion dollars put in the hands of middle-income families is $120 billion injected into the economy,” Summers said during a speech at the Center for American Progress. “It is $120 billion that enables strapped families to spend money on what they need.”

The buzz has become so loud that lawmakers who are worried about efforts to maintain the temporary tax cut have already approached party leaders.

“Mr. Hoyer believes the payroll tax cut was meant to be temporary and has heard from members concerned about an extension,” said Katie Grant, a spokeswoman for House Minority Whip Steny Hoyer (D-Md.).

Mark Zandi, chief economist at Moody’s Analytics, says that allowing the payroll tax cut to expire would hurt the economy and cut gross domestic product by six-tenths of 1 percent in 2013.

Still, he said that of all the provisions on the table when Congress returns to Washington after the election, the payroll tax break is the one to lose.

“It’s time to allow it to expire,” he said. “The private sector is strong enough to have some fiscal restraint and if you’re looking at all of the things that are going to expire soon, payroll would be near the top of the list of things to let go.”

CORRECTION: A previous version of this story misquoted Amy Brundage. She says the very first thing Congress should do is extend middle-class tax cuts.

CORRECTION: Corrected by: Kourtney Geers @ 11/01/2012 12:47 PM CORRECTION: A previous version of this story misquoted Amy Brundage. She says the very first thing Congress should do is extend middle-class tax cuts.