Republicans back payroll tax cut extension

US Senate Minority Leader Mitch McConnell (R-KY) makes a speech about sweeping gains in mid-term elections, at the Heritage Foundation in Washington, November 4, 2010.

WASHINGTON (Reuters) - Republicans in Congress on Tuesday threw their support behind a payroll tax cut extension, trying to blunt charges ahead of 2012 elections of favoring wealthy Americans over middle-class workers.

Until Tuesday, Republicans had been lukewarm on extending President Barack Obama's payroll tax cut for workers, indicating they were open to negotiating it but never explicitly backing a measure, which the White House says will boost the country's sputtering economic recovery.

The move by Republicans could help avert an end-of-year battle with Democrats after months of bitter budget battles that brought the country to the edge of default in August and cost it its coveted AAA rating from Standard & Poor's.

Some analysts estimate the payroll tax cut is estimated to boost economic growth by as much as 1.5 percentage points.

"In all likelihood we will agree to continue the current payroll tax relief for another year," Senate Republican leader Mitch McConnell said after a closed-door meeting of his colleagues.

McConnell said there was now "a majority sentiment" among Republicans for continuing the temporary tax cut.

The Republican leader said the Senate and House of Representatives also would work to strike a deal on another contentious issue: Democratic demands to extend unemployment benefits that begin to expire on December 31.

"First we need to do the payroll tax. It's like a puzzle. It will fit together," a Democratic aide said of the tax cut and jobless benefit extensions.

By early next year, 2.1 million people will lose their unemployment insurance if the program is not extended for those who have been unable to find work for an extended period, amid a 9 percent jobless rate.

Without congressional action by December 31, the payroll tax that workers pay would revert to 6.2 percent, up from the current, temporary 4.2 percent tax.

2012 ELECTION MANEUVERS

In political maneuvers foreshadowing the 2012 presidential and congressional election debates, Democrats are arranging a Senate vote later this week to extend and expand the payroll tax cut.

They want to offset the lost revenue with a 3.25 percent tax on income over $1 million a year, but Republicans vehemently oppose raising taxes on the rich, arguing that would hurt job creation.

If Republicans block the measure, as expected, Democrats would paint them as the party of the rich.

Trying to get ahead of the game, McConnell proclaimed Republican support for the payroll tax cut extension and told reporters his party would soon propose its own ideas for covering the cost of the tax cut.

"The Democrats put them in a box," said Andrew Taylor, a North Carolina State University political science professor. "I think many Republicans realized this is a bad side of the argument to be on."

The Democratic measure due to be voted on Thursday would not only extend the payroll tax cut for a year. It also would further cut the tax to 3.1 percent, from the current 4.2 percent, and also put employer payroll tax payments at the low rate too.

Top White House economist Alan Krueger said on Tuesday that extending the tax cut would strengthen the U.S. economy.

"This is a critical time for the economy and I think it's a time when the economy could use more medicine to strengthen and sustain the recovery," Krueger told a news briefing.

McConnell did not provide details on how Republicans would offset the cost of extending the tax cut. There has been speculation among some Democratic aides in Congress that Republicans could take aim at new federal subsidies under President Barack Obama's overhaul of the healthcare system.

While that likely would prompt Democratic opposition, a new round of ideas later in December could find bipartisan backing.

Among the ways to potentially cover the cost of renewing the payroll tax cuts are: cutting federal farm subsidies, selling some government assets, reducing federal pensions and administrative savings in the Medicare healthcare program for the elderly. All these ideas have been discussed in past budget negotiations.

(Additional reporting by Donna Smith and Thomas Ferraro; editing by Anthony Boadle)