Democrats, GOP inch closer to a tax deal

Senate Democrats and House Republicans on Monday inched closer toward a deal that would extend and expand a payroll tax holiday.

In hopes of luring GOP defectors, Senate Democrats unveiled a new version of their payroll tax legislation that ditches President Obama’s plan to expand the relief to employers. That move cuts the tax break’s cost from $265 billion to $185 billion.

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Republican leaders immediately pushed back on the proposal and criticized Democrats for pushing tax increases on individuals and small businesses earning more than $1 million annually. 

But GOP sources hinted the bill might form the basis of a later deal if Democrats agree to drop the surtax on millionaires that would be used to offset the cost of the legislation.

Republicans viewed the inclusion of reforms to Fannie Mae and Freddie Mac and unemployment insurance as a positive development. Those items are also likely to be included in a House Republican proposal.

The House GOP push to draft its own payroll tax proposal has slowed. Republican leaders faced significant resistance from conservatives during a closed-door conference meeting Friday, and their plan was not released on Monday night, pushing a floor vote to Thursday at the earliest.

Because Republicans would almost certainly need Democratic votes to pass an extension of the payroll tax, House leadership could scrap a floor vote on their competing plan if they make headway in negotiations with the Senate.

The two sides also need to work out a deal on unemployment benefits and a fix to the Medicare reimbursement rate. Republicans want those measures to be offset with spending cuts and are including them in their proposal, while Senate Democrats do not address them in their payroll tax plan.

Obama, who kept his distance from the fall’s budget-cutting negotiations, on Monday pressured Republicans to extend the tax break. 

The president accused the GOP of flip-flopping by demanding that the cost of extending the holiday be paid for, since the Bush tax rates and the original payroll break were approved last year without an offset.

“Indeed, when the Republicans took over the House at the beginning of this year, they explicitly changed the rules to say that tax cuts don’t have to be paid for,” Obama said. “So forgive me a little bit of a confusion when I hear folks insisting on tax cuts being paid for.”

The latest proposal from Democrats, sponsored by Joint Economic Committee Chairman Sen. Bob Casey Jr. (D-Pa.), would set workers’ payroll tax rate at 3.1 percent for one year, half of the 6.2 percent rate they paid in 2010.

Democrats estimate the average family would pay $1,500 less in taxes when compared to letting the tax holiday expire. 

They would pay for the legislation by raising taxes on millionaires, implementing mandatory spending cuts discussed by the deficit-reduction supercommittee and denying food stamps and unemployment benefits to millionaires.

Senate Majority Leader Harry Reid (D-Nev.) called on Republicans to embrace the proposal, citing polls that show broad public support for increasing taxes on the very wealthy.

“Republicans need to be prepared to meet us partway. We are offering a serious proposal with meaningful concessions, including spending cuts Republicans have already agreed to,” Reid said on the Senate floor.

Democratic aides stressed that various Republicans have supported every element of the package in the past.

Republican leadership aides voiced concerns with the plan and said Democrats are wasting time with the small-business tax hike.

“This proposal moves in the right direction, but the inclusion of the small-business tax hike is a ‘poison pill’ that shows Senate Democrats are aiming to fail — so President Obama can attack Republicans,” said a House GOP leadership aide.

A Senate GOP leadership staffer said: “It looks like they’re raising taxes on small businesses in order to make it happen. That’s been defeated four times already this fall,” referring to previous attempts to raise taxes on millionaires.

Democrats such as Sens. Ben Nelson (Neb.) and Jim Webb (Va.) are opposed to raising taxes on ordinary income and are expected to vote no on the newest proposal.

Another Democrat, Sen. Joe Manchin (W.Va.), has concerns about the funding stream for Social Security being weakened. The payroll tax funds the program.

The Democratic proposal would raise taxes on income over $1 million by 1.9 percent, less than the 3.25 percent increase that accompanied the $265 billion plan the Senate defeated Thursday. 

It would also increase the fees that government-sponsored enterprises Fannie Mae and Freddie Mac charge mortgage lenders, a proposal discussed by the supercommittee that would raise $38.1 billion.

A Democratic official familiar with leadership talks said Democrats decided to keep the millionaire surtax as an offset because they were encouraged by the defection of Sen. Susan Collins (Maine), the only Republican to vote with Democrats on a motion to proceed to the previous version of the legislation. 

Unlike in last week’s bill, the modified surtax would sunset after 10 years, answering the Republican argument that it is unwise to establish a permanent tax increase to cover the cost of a temporary stimulus measure. It would take effect after Dec. 31 of 2012. 

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Obama pressed Republicans on Monday to accept the modified centerpiece of his jobs package and rejected counterproposals to pay for it by cutting federal programs dear to Democrats. He said it would be “irresponsible” to make further cuts to the safety net and social programs to pay for the legislation.

Cracks have emerged in the GOP Senate and House caucuses over how to proceed on payroll taxes.

Twenty-six Republicans voted against an alternative payroll tax plan supported by Senate Minority Leader Mitch McConnell (R-Ky.) that would have paid for the cost by cutting the federal workforce and safety net programs.

The Democratic legislation borrows language from the GOP bill stopping millionaires from receiving unemployment benefits and food stamps. A Democratic aide cited it as evidence of a good-faith compromise.

Aides say that given the common ground on the issue, if and when Democrats drop their insistence on a tax hike for millionaires, serious negotiations could begin and a deal could get done quickly. 

— Bernie Becker contributed to this report.

This report has been corrected to accurately reflect the positions of Sens. Ben Nelson and Jim Webb.