New drama over taxes and spending looms

WASHINGTON Sun Nov 20, 2011 6:30pm EST

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WASHINGTON (Reuters) - The "super committee" may be effectively dead but brinkmanship in Congress over taxes and spending will only escalate as the impending expiration of several provisions threatens to undermine the economy.

If Congress does not extend them by the end of the year, workers will see less money in their paychecks, nearly 2 million jobless people will lose the benefits that help them make ends meet, and Medicare patients may have a harder time getting in to see the doctor. Countless businesses will see their tax bills rise.

Analysts have warned that this effective tax increase, which would kick in on January 1, could push the economy back into recession even as it struggles to recover from the last one.

Goldman Sachs economists warned that economic growth could slow by 1.5 percentage points in early 2012 if all temporary measures are allowed to expire. Analysts polled by the Federal Reserve project gross domestic product to grow at a rate of 2.4 percent next year.

"We don't want to get up in the morning and not have some short-term support for the recovery," said Paul Ballew, chief economist at Nationwide Insurance.

The uncertainty has frustrated businesses, which have begun to ramp up pressure on Congress to act.

President Barack Obama proposed extending some of these elements as part of his now-dead jobs package, and his fellow Democrats hoped to wrap them into any deal that might have emerged from the super committee.

Absent a deal, it will be much harder to pass those elements through a bitterly divided Congress as Republicans and Democrats try to present themselves as the best stewards of the U.S. economy in the 2012 election campaign.

Any super committee deal would have been fast-tracked through Congress. Votes would have been guaranteed in the House of Representatives and the Senate, and lawmakers would have been unable to change the bill.

The usual procedural hurdles that enable a single lawmaker to delay legislation by up to a week in the Senate would have been set aside.

Now, Senate Democratic Leader Harry Reid must find at least seven Republican votes and a week's worth of time to pass these elements through the Senate. There is no guarantee that Republicans, who control the House, will even bring them up for a vote.

BROAD-BASED STIMULUS

Payroll tax cuts and jobless benefits are among the most effective ways to boost the economy because they put money in the hands of people who spend it quickly, according to the nonpartisan Congressional Budget Office.

Republicans backed a one-year payroll tax cut from 6.2 percent to 4.2 percent and an extension of enhanced jobless benefits last year, but that was part of a larger tax package that included elements they wanted, such as an income-tax cut for the wealthy.

Many have said they are not inclined to extend the payroll tax for another year on the grounds that businesses would react more favorably to permanent changes in tax law.

Enhanced unemployment benefits likewise face widespread skepticism from Republicans.

Jobless benefits, which average $296 per week, normally run out after six months, but additional federal aid has stretched the deadline to as high as 99 weeks during an economic downturn that has created record numbers of long-term unemployed.

But after pushing for steep spending cuts all year, Republicans will likely to be reluctant to back these two provisions without further spending cuts to offset their combined cost of $168 billion.

"Certainly, we would want to make sure that they are paid for," the super committee's top Republican, Representative Jeb Hensarling, said on Fox News Sunday.

Other expiring elements are typically renewed without as much drama.

Congress has routinely pushed back a planned cut to doctors and hospitals who accept patients under the Medicare health program for the elderly, and will have to do so again at the end of this year, a move that has happened so many times it is known as the "doc fix" on Capitol Hill.

Other elements, such as a "patch" to the alternative minimum tax to prevent it from hitting middle-class taxpayers and business credits for research and new purchases, also are routinely extended.

Congress traditionally renews about 60 of these each year, though they were allowed to lapse for much of 2010 before being reinstated retroactively. (Additional reporting by Anna Yukhananov; Editing by Cynthia Osterman)

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