Payroll tax deal close: Why did Republicans back down?

After months of impasse, Congress is on track to extend a payroll tax cut and other provisions affecting millions Americans that were set to expire Feb. 29.

House Republicans wanted offsets, or spending cuts, to make up for the nearly $100 billion cost of extending the tax cut holiday through 2012. 

But the politics wasn't working out for Republicans. On Monday, House speaker John Boehner, flanked by majority leader Eric Cantor of Virginia and majority whip Kevin McCarthy of California, offered to back an extension of the payroll tax holiday without offsets. 

House Republican leaders faced their caucus late Tuesday with a blunt message: We got the policy right but the politics wrong – and now it’s time to move on, they said, according to members at the closed meeting.

“This hasn’t been an exercise in public relations that we were winning, and we need to get this behind us so we can get on to something new,” said nine-term Rep. Steven LaTourette (R) of Ohio, summarizing the pitch from leadership.

Some Republicans left Tuesday's closed meeting noncommittal on whether they could back a comprehensive deal, unless it involved significant reform or offsets for the other elements of the package: extending unemployment insurance and blocking an automatic 27 percent drop in reimbursement rates for physicians treating Medicare patients – the so-called “doc fix.”

The draft deal keeps the employees’ share of the payroll tax at its current 4.2 percent level. Should the measure fail to pass, employees would see their payroll taxes rise to a 6.2 percent level, equivalent to about $40 in salary every two weeks for the average worker. 

Democrats had proposed offsetting the nearly $100 billion cost of the extension by raising taxes on the highest income Americans.

The deal also extends jobless benefits for the long-term unemployed, although not for the full 99 weeks under current law. Republicans had called for a top benefit at 59 weeks. The compromise deal, not yet confirmed, would return the maximum benefit to previous historic levels for an economic downturn for about 73 weeks.

Lawmakers close to the negotiations say the extension of benefits will be paid for by $50 billion in mixed revenues, including a hike in contributions from federal employees to their pensions and new revenue from the sale of broadcast spectrum to wireless companies. States with high unemployment rates may be eligible for more weeks of coverage.

The draft deal also includes offsets for extending the “doc fix.” These include cutting Medicare reimbursements to hospitals and cutting anti-smoking and obesity funding in the president’s signature health-care law.

“They’re not going to get unemployment and the doc fix without significant reform,” says Rep. Tom Cole (R) of Oklahoma. “I wouldn’t vote for the final product without the federal workforce [pensions] in it.”

House Republicans took a beating on blocking an extension of the payroll tax hike in December, as they remained the last holdouts to a deal backed by the White House, most Democrats and Senate Republicans, and even Americans for Tax Reform – the self-appointed guardians of the “taxpayer protection pledge,” signed by most GOP members of Congress.

“While a spending cut offset is ideal, it is not necessary,” said a statement on the Americans for Tax Reform website. “It doesn’t ‘cost’ taxpayers anything to let taxpayers keep their own money.”

“It’s not fair to subject tax relief to the same need for spending cut offsets that conservatives rightly demand of new spending programs,” the statement continues. “The latter is a new burden faced by taxpayers. The former is easing the burden on taxpayers.”

House and Senate Democratic leaders backed the deal, subject to seeing the final details. They see the prolonged legislative battle, especially the refusal of GOP leaders to consider a tax hike on high incomes to help middle class workers, as a plus for their side heading into an election.

“If you want to have an argument about whether you want to help people making $40,000 or people making $1 million, we’re happy to have that argument,” says Nadeam Elshami, a spokesman for House Democratic leader Nancy Pelosi.  “We’ve won that argument.”

With Congress in recess next week, lawmakers have until Friday to vote an extension of expiring benefits – a deadline leaders on both sides of the aisle say they expect to meet.

Otherwise, they said, the policy undermined Social Security for the long term and added to the $1 trillion-plus federal deficit.

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