A small number of Republican lawmakers indicated that they would be open to the idea of raising additional revenues to offset the cost of extending the payroll tax cut, a break in what has been the party’s nearly solid ranks against tax increases.
Senate Republican leaders introduced a bill that would keep the payroll tax rate at its current level for another year. The cost is roughly $120 billion. Senate Republicans would offset most of the cost by freezing the pay of federal employees through 2015 and gradually reducing the federal work force by 10 percent.
In addition, Senate Republican leaders would go after “millionaires and billionaires,” not by raising their taxes but by making them ineligible for unemployment compensation and food stamps and increasing their Medicare premiums. Democrats said that this part of the Republican proposal was not serious, pointing out that high earners were already ineligible to receive food stamps.
The Congressional Budget Office said the Republican bill would reduce federal deficits by $111 billion, mainly because of the pay freeze and the reduction in the federal work force. Senate Democratic leaders want a deeper temporary reduction in Social Security payroll taxes. They would provide payroll tax relief to employers as well as employees. And they would offset the cost with a 3.25 percent surtax on modified adjusted gross income in excess of $1 million.
President Obama, at a campaign-style rally in Scranton, Pa., said Wednesday that if Congress failed to extend the payroll tax cut, it would be “a massive blow for the economy, because we’re not fully out of the recession yet.”
Mr. Obama said Americans should send a message to Congress: “Don’t be a Grinch. Don’t vote to raise taxes on working Americans during the holidays. Make sure to renew unemployment insurance during the holidays.” The Senate is expected to reject the Democratic proposal in the next few days, opening the door to further negotiations with Republicans next week.
Adam Jentleson, a spokesman for the Senate majority leader, Harry Reid, Democrat of Nevada, said: “We are glad Republicans have seen the light and taken up Democrats’ call to pass a middle-class tax cut, just a few days after their leadership indicated they would oppose it. However, Democrats’ proposal would put more money in the pockets of middle-class families and create more jobs.” He said Democrats would work with Republicans “to negotiate a consensus solution.”
Last December, Congress temporarily reduced the employee’s share of the Social Security payroll tax by 2 percentage points, to 4.2 percent of wages. If Congress does nothing, the rate will revert to 6.2 percent in January.
Mr. Obama, Democratic lawmakers and many economists say such a tax increase would take money out of workers’ pockets, depressing consumer demand for goods and services and setting back the fragile economic recovery. Speaker John A. Boehner said Wednesday that he was “interested in working with the president to find common ground” on the payroll tax cut. He said the tax break must be paid for, but not with a surtax on high income.
Mr. Boehner referred to the surtax as a “job-crushing tax hike on small businesses” because some small-business owners report business income on their personal tax returns.
Interviews with rank-and-file House Republicans found ambivalence about the idea of extending the payroll tax cut.
“A payroll tax is a dedicated tax for Social Security,” said Representative Jeff Flake, Republican of Arizona, who voted against a tax package last year that included the payroll tax cut. “Unless we are willing to have a commensurate change in benefits, then we shouldn’t do it. It certainly isn’t a supply-side or simulative tax cut. I’m for ending it.”
Representative James Lankford, Republican of Oklahoma, said that he was open to extending the cut, but had deep concerns and would need convincing. “I want to be very careful,” he said. “If this is going to be a long-term rate, let’s set it and resolve long-term issues of Social Security. I am opposed to saying times are tough, let’s make it more tough for my kids.”
The Senate Republican leader, Mitch McConnell of Kentucky, said, “Republicans will put aside their misgivings and support extension” of the payroll tax if “it will give some relief to workers” still struggling in a bad economy.
Senator Mike Johanns, Republican of Nebraska, said Wednesday that he was willing at least to consider a tax increase on high earners as part of a comprehensive deficit reduction package.
“I sense a change in mood,” Mr. Johanns said. “It’s a little more bipartisan. My position has always been, ‘Let’s not raise taxes,’ but on the other hand I don’t want our country to collapse under a mountain of debt. If that means compromise, I am going to do everything to get that done.’ ” Senator Susan Collins, Republican of Maine, said that she had formulated a plan to pay for extension of the payroll tax cut with a tax increase on high earners that carved out employers, so they would not be hit with higher rates.