Washington has been consumed during the past week by debates over the fate of a payroll tax cut first created in 2010 as part of the compromise to extend the Bush tax cuts and currently set to expire at the end of 2011. The 2010 compromise reduced the Social Security tax paid by employees from 6.2% to 4.2% and President Obama has strongly supported extending and expanding this cut in 2012, along with a similar tax cut for employers. Although there is strong support in both the Senate and the House for some form of extension, if not an expansion of the tax cut, Republicans and Democrats have clashed on how to offset the loss in Social Security trust fund revenue that this measure will necessitate. Democrats have proposed replacing payroll tax revenue with a surcharge on income tax over $1 million, while Republicans have countered with a proposal to replace the revenue through cost saving measures, including a pay freeze for federal employees and the elimination of federal jobs.
As leadership in the Senate and House look for a way to bridge the gap between offset proposals, Senators Claire McCaskill (D-MO) and Susan Collins (R-ME) have introduced a bipartisan proposal that would not only expand the payroll tax cut to apply to both employees and employers in 2012, but would also include $35.8 billion in new spending for road and water infrastructure projects. This legislation would provide $10 billion for states to increase capitalization of state infrastructure banks, which leverage private funding to finance large infrastructure projects. It would also include $25 billion in new bridge and highway funding authority, which would be distributed through FHWA formula programs, as well as $800 million in new funding for the Clean and Drinking Water State Revolving Loan Funds. The payroll tax cut and new spending would be paid for by a combination of an interest tax surcharge on millionaires and the elimination of tax breaks for large oil companies.
Democrat and Republican leaders continue to debate the payroll tax extension, and no proposal has yet obtained the support of both parties. Senate Minority Leader Mitch McConnell has expressed his opposition to paying for the payroll tax cut by raising taxes on the wealthy, leaving the fate of the McCaskill-Collins proposal in doubt. However, Congress must act on some form of payroll tax extension by the end of the year or face a tax increase for all American workers.
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