U.S. payroll tax cut, jobless aid deal likely

Let the games begin. A little late, but it appears as if we will get some form of tax legislation this year.

According to Reuters,U.S. lawmakers are likely to agree to extend payroll tax cuts and emergency unemployment assistance.

Stunts designed to score political points may intercede, but in the end, the direct hit to Americans’ wallets and risks to the economy posed by lapses in either program make an agreement probable, aides said.

Republicans will push hard to get both extensions fully paid for and make them deficit-neutral. If that can be assured, a deal will happen, they said. “Republicans understand the pressure of getting something done … We’ll be pushing to have it paid for,” said a senior Republican aide who asked not to be named. The debate over U.S. government spending and taxes has shifted since last weeks failure of Congress’ “super committee” to find $1.2 trillion in federal budget savings over 10 years.

Democrats are expected to seek extension and expansion of cuts to U.S. payroll taxes, paid by employees and employers that fund the Social Security retirement pension system. The payroll tax cuts were put in place almost a year ago as economic stimulus at President Barack Obama’s request. Now he wants to extend and possibly expand them. With jobless rates high, the president and Democrats also want to extend emergency unemployment insurance. Together, these two initiatives would cost about $200 billion.

Senate Democrats may seek a vote in early December on a proposal to pay for both programs with a tax on millionaires, aides said. While the proposal is likely to fail, it could give Democrats a chance to blast Republicans opposing it as friends of the wealthy, aides said. In the House of Representatives, Republicans may attempt to hold a vote on paying for the extensions with a measure attacking President Barack Obama’s health care programs. It could pass the House, but would likely die in the Senate.

Extenders will wait.

Time constraints will delay until 2013 congressional action on other tax and spending issues, aides and analysts said. These include extending dozens of tax breaks, such as one for business research and development, and once again “patching” the alternative minimum tax so it does not hurt middle-class taxpayers it was never meant to reach.  Our advise on the extender bill is, it is a “Lame duck until end of next year”.  Next year planning should be extremely interesting.

Broad tax reform

A project that has not been tackled in 25 years and that proved to be far beyond the reach of the ill-fated “super committee”—likely will wait until 2013. Lurking in the background, now that the Joint Select Committee on Deficit Reduction has collapsed, are $1.2 trillion in automatic budget cuts set to take effect in early 2013.

Some Republicans are already trying to undo the cuts targeting defense spending. They face resistance from Obama and leaders of both parties. Another U.S. credit rating downgrade could follow any dismantling of the cuts, analysts said. Enforcement of the cuts, known on Capitol Hill as the “sequester,” will be a point of conflict, analysts said, possibly erupting in a legislative battle as early as mid-December and likely dragging well into the elections.

We will keep you posted as this legislation unfolds. If you have any questions regarding year end planning, please do not hesitate to contact us.

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