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Economy & Policy

Senate to Vote on Dueling Payroll Tax Bills

The Senate is expected to vote Thursday evening on a pair of dueling bills that would extend a break on payroll taxes into next year.

While neither plan is expected to muster enough support to advance, the partisan votes may clear the way for lawmakers to negotiate a less controversial way to pass a tax break backed by both parties.

Democratic and Republican leaders have both said they support extending the current break on Social Security taxes for an additional year to prevent workers' paychecks from shrinking. If Congress takes no action this month, workers in January will face a payroll tax of 6.2 percent of earnings, which lawmakers cut to 4.2 percent last December.

However, Democrats and Republicans diverge on whether to further reduce the tax and how to offset its cost with other spending cuts. The Democratic proposal before the Senate would extend the payroll tax break to employers and further cut workers' Social Security taxes to 3.1 percent of earnings, echoing an earlier proposal from President Barack Obama.

Democrats would pay for the tax cut by imposing a 3.25 percent surtax on income over $1 million, a politically charged provision few, if any, Republicans could stomach.

Meanwhile, Republican senators unveiled their own plan Wednesday that would just extend for one year the current payroll tax break for employees. The GOP bill would pay for the cost of the tax break through measures that include shrinking the size of the federal government's work force and freezing civilian federal employees' salaries for three years.

Though lawmakers traded jabs this week over the partisan proposals to pay for the tax break, policymakers signaled there is room to compromise in order to extend the tax cut before it expires at the end of the year.

"We would be interested in talking about a proposal that offsets that spending, that tax cut for the middle class," House Minority Leader Nancy Pelosi (D-Calif.) told reporters Thursday. "That would not include firing 200,000 people," she said, in reference to the GOP proposal to reduce the federal work force by 10 percent by hiring only one new federal employee for every three that retire. However, Democrats "would certainly be open to reasonable pay-fors for the tax cut," she said.

House Republicans have yet to unveil a formal plan of their own. However, House Majority Leader Eric Cantor (R-Va.) is in discussions with other lawmakers about how to renew federal unemployment benefits, extend the payroll tax break and resolve this year's Medicare "doc fix," as well as replace the first year of spending cuts proposed in the sequester with other mandatory spending cuts, his staff said.

Automatic spending cuts, half of which target defense spending, are slated to go into effect in 2013 because a special congressional committee failed to come up with a plan to reduce the deficit.