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Democrats Divided Over Payroll Tax Cut Extension

They may be united on raising tax rates on the rich, but Democrats appear divided over whether to extend the president’s signature payroll tax cut as part of any fiscal cliff deal.

“I’m torn,” Sen. Chris Coons, D-Del., said.

Coons said he believes extending the tax cut would provide the weak economy with needed stimulus but said he’s concerned that continuing the cut for a third straight year could threaten funding to Social Security, which is paid for by the tax.

“It is something that puts money right in the pockets of working families in very tough economic times,” Coons said. “But a number of members of my caucus have spoken out fairly strongly against it because … even though what is lost from the [Social Security] trust fund is made whole from the general treasury, it is not a long-term sound piece of tax policy.”

Sen. Bob Casey, D-Pa., said he believes economic circumstances demand that the cut — which costs $120 billon a year and provides an average of an additional $1,000 per household a year — be extended to ensure continued recovery.

“It is one of the reasons why we had a more robust recovery as it relates to jobs,” said Casey, who is chairman of the Joint Economic Committee. He said the cut helped create or save 400,000 jobs this year.

The payroll tax is normally 6.2 percent but was reduced to 4.2 percent in 2010, a rate ultimately extended through the end of this year. It will expire unless Congress acts.

Casey did not rule out seeking signatures for a letter staking out his position. He also plans to make the case at an economic committee hearing Thursday.

Casey said the payroll tax cut has a proven track record of job creation and economic growth, which will help deal with the billions in expiring tax cuts and automatic spending reductions, known as the fiscal cliff, set to begin going into effect next year.

According to the committee, the tax cut boosted economic growth nationally by an estimated half a point in 2012. The committee also noted that families making less than $150,000 a year are responsible for nearly 82 percent of consumer spending, and families earning less than $70,000 per year are responsible for nearly half of all consumer spending.

Casey isn’t alone in his advocacy for extending the cut. “I’d like to see the tax cut extended. We are not out of a recession yet,” Sen. Carl Levin, D-Mich., said.

House Budget ranking member Chris Van Hollen, D-Md., agreed, saying on NPR’s “The Diane Rehm Show” Monday that a one-year extension would provide “assistance to 160 million working Americans and would do far more, according to the nonpartisan Congressional Budget Office, than a small increase in the marginal tax rate with respect to the economy. It’s much bigger than that.”

Casey said he expects to get “substantial support” from Democrats for extending the tax cut, adding, “I think it’s still early in the debate.”

But other Democratic caucus members — such as Sens. Bernard Sanders, I-Vt., and Tom Harkin, D-Iowa, — are less inclined to back an extension, noting that because the tax funds Social Security, a third year of reducing the program’s funding could weaken its viability in the future.

“I think extension of the payroll tax holiday is the wrong way to go because it’s going to divert, and continue to divert, substantial sums of money from Social Security,” Sanders said. “Furthermore, if you do it for a third year … then you probably have laid the groundwork for a permanent reduction in the payroll tax … and that would create a very difficult scenario for the funding of Social Security and add to the argument for those people who want to destroy Social Security.”

Asked about the loss of stimulus to the economy, Sanders said he believes Congress and the White House will replace it. Some have pointed to the $400 Making Work Pay tax credit from the 2009 stimulus package as a substitute.

“I am concerned about that,” Sanders said. “What we have got to do, and my understanding is that the administration is open to this, is to come up with another approach perhaps ‘Making Work Pay,’ which does make sure that people don’t take a hit.”

The White House’s most recent deficit reduction plan proposes to either extend the payroll tax cut or enact an equivalent tax stimulus.

Sen. Mark Begich, D-Alaska, said he, too, thinks the tax cut should expire.

“I am open to any alternative,” Begich said. “I am happy to look at it, but we need to end it.”

Coons, along with Sen. Jack Reed, D-R.I., said he believes that extending unemployment insurance should take precedence over the payroll tax credit.

“The program providing the most stimulus is the UI,” said Reed, who spearheaded a letter with 41 other signatories sent this week to Senate leaders on the issue. “It also is the program that goes directly to people who typically have very little means to cope with everyday expenses.”

Others, such as Democratic Sens. Sherrod Brown of Ohio, Claire McCaskill of Missouri, and Mark Pryor of Arkansas, were undecided, or did not want to pre-judge a deal being crafted by congressional leaders.

“I am not going to draw a line in the sand about anything because I think all of this could be part of a [deficit reduction] compromise,” McCaskill said.

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