Year-End Wrap Up
Two headlines in Politico this morning tell the story on tax policy for the remainder of the year: “Tax Cut Boils Down to Who Pays” and “K Street Mounts Last-Ditch Blitz for Tax Breaks.”
The first headline refers to the pending expiration of the payroll tax holiday. The Administration, Congressional Democrats, and some portion of the Republican conference support extending the payroll deduction through the upcoming year. As Politico reports:
It’s all but a foregone conclusion that President Barack Obama will win on the payroll tax-cut extension — on politics, policy or both — but Congress still has two weeks to fight over the particulars of who foots the bill or who takes the blame.
We’re not sure how “forgone” extending the payroll tax holiday is. The challenge for the payroll tax extension goes beyond finding an offset that a majority of members in the House and the Senate can live with. It also means overcoming opposition among conservatives, primarily in the House, to any temporary “stimulus” measure that either increases the deficit or uses up spending and revenue measures that could be otherwise used for deficit reduction.
The latter challenge was made clear last week when a majority of Republican Senators opposed a McConnell-led effort to offset the payroll tax extension with cuts to federal employee benefits and jobs. Nonetheless, House Speaker John Boehner intends to bring up an extension, perhaps as early as this week.
Meanwhile, Senate Democrats will reveal a new payroll tax proposal as early as today. According to the National Journal:
Senate Majority Leader Harry Reid, D-Nev., on Monday will offer a new Democratic proposal to expand a payroll tax for employees while tweaking how the bill is paid for in a nod to Republican concerns.
Democrats will scale back a bill rejected in a Senate vote last week by eliminating proposed payroll tax benefits for employers. The new bill will leave in place a proposal to cut the payroll tax for employees from 4.2 to 3.1 percent, a senior Democratic aide said. That will cut the cost of the plan from $265 billion to $180 billion, in an attempt to address GOP concerns about the overall cost of the measure, said the aide.
What’s left unclear is how the lower price tag will be covered. The last Democrat offering was offset by a 3.25 percent surtax on incomes exceeding $1 million. As a prior Washington Wire pointed out, four out of five of those taxpayers impacted are business owners. More recent talk is that the new offset might be savings from drawing down forces in the Middle East.
Meanwhile, Congress continues to work on other “to-do” items for the remainder of December, including federal government funding plus a possible UI extension, the so-called Doc Fix, an extension of expiring tax provisions, and protecting middle-class taxpayers from the Alternative Minimum Tax.
The second Politico headline makes clear just how difficult this “to-do” list is. The story focuses on all the tax provisions that will expire at the end of the year and is pointed at K Street, but each of those provisions has a Main Street constituency and collectively could affect the economy as much, if not more, than the expiration of the payroll tax holiday. As Politico notes:
Industries as diverse as real estate, housing, education, energy and automobiles are making the case to lawmakers that passing an extenders package is just as important to the economy as measures that appear more likely to pass, such as unemployment insurance, the doc fix and the payroll tax holiday.
The largest are the R&E tax credit relied upon by manufacturing and high-tech firms, as well as the state sales tax deduction used by taxpayers in states without an income tax. For S corporations, the current 5-year holding period for built-in gains assets would return to an unreasonable 10 years, while the more friendly treatment of charitable donations would expire.
Politico says the payroll tax fight comes down to “who pays”, but that really applies to all the remaining items. Coming up with $200-250 billion in permanent offsets to extend existing policies for a year is a serious hill to climb, and there’s only two weeks to figure it out. As with the Super Committee, we’re skeptical Congress can figure it out in time. Some of these items may pass, but it’s unlikely all of them will.