December 21, 2011 / 7:40 PM / 8 years ago

Scenarios: Payroll tax break fate uncertain

WASHINGTON (Reuters) - A tax break for about 160 million U.S. workers is set to expire in 10 days and Republicans in the House of Representatives and Democrats are battling over how to extend it.

House Republicans have rejected a two-month extension that the Senate overwhelmingly approved in order to give lawmakers more time to negotiate a full year deal. Instead, House Republicans are demanding immediate negotiations to settle differences over a year-long extension by December 31.

It is unclear how this can get sorted out. But here are some possible scenarios on how lawmakers might proceed.


The standoff between the Democratic-led Senate and the Republican-led House could continue through Christmas and New Year holidays and the 4.2 percent tax rate workers’ pay into Social Security snaps back to 6.2 percent on January 1.

Senate Democrats say they need the House to pass the Senate bill as a good faith gesture that a year-long deal would be negotiated in good faith. Senate Majority Leader Harry Reid has said he will not engage in talks with the House until Congress passes the temporary bill he negotiated with Senate Minority Leader Mitch McConnell.

Right now a continued standoff has a good probability of playing out. It involves frequent press conferences by both sides to try to pin blame on each other for the smaller paychecks after January 1.


If Congress fails to act by December 31, Congress could return to Washington in early January to sort out the conflict and make the payroll tax break retroactive to January 1.

Also tied to the payroll tax bill are an extension of jobless benefits for the long-term unemployed and a provision to avert a pay cut for doctors treating patients on the Medicare health program for the elderly.

Any resolution would also make those provisions retroactive to January 1. It has been done before on unemployment benefits, doctors’ payments and other tax issues. This scenario is likely if the standoff spills over into the new year.

A number of economists say failure to extend the payroll tax cut could threaten the sluggish U.S. economy. Several said this week that the economy could withstand a short-term lapse in the law, if a deal were reached sometime in January.


Either the Senate or the House could cave in to what is bound to be increasing public pressure to act. Reid and McConnell could dispatch some negotiators to talk with the House and try to work out an agreement by the deadline.

It would take some finessing to do this in a way that saves face for Democrats who control the Senate. At this point they show no signs of bowing to House Republicans.

Meanwhile, House Republicans are facing increasing pressure from some in their own party to pass the Senate bill. It is unlikely they would just throw in the towel and capitulate. But House Republicans might save face by passing something similar to the Senate bill and then forcing a quick negotiation with the Senate on that.


The Democratic president, who is putting off a Hawaii vacation while Congress squabbles, could take on a bigger role in pushing for a deal. He spoke by telephone separately on Wednesday with House Speaker John Boehner and Reid to urge passage of the Senate bill to give time to negotiate a one-year extension.

There are potential pitfalls for Obama to get more involved. His popularity is rising somewhat in public opinion polls and he might not want to put that at risk, especially after he failed to broker a major budget deal with Republicans last summer. But even if he doesn’t become a broker, he will likely use the power of his bully pulpit to slam Republicans, claiming they are standing in the way of a middle-class tax cut.

Reporting By Donna Smith; Editing by Eric Walsh and Vicki Allen

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