Congress reaches payroll tax deal
Republicans in the US House of Representatives have backed down and agreed to extend payroll tax cuts for the first two months of 2012, ending the risk of a sudden tax rise on January 1.
Under a deal with Democrats in the Senate, there will be administrative tweaks to reduce the cost to business of complying with a two-month extension, and the House and Senate will negotiate how to offset the cost of an extension for the rest of 2012.
But the deal gives no ground on the main Republican demand of an immediate full-year extension paid for by limits on unemployment benefits and welfare eligibility. The battle over the payroll tax extension has dominated US political debate in recent weeks and allowed President Barack Obama to outflank Republicans on what is normally their signature issue of tax cuts.
The fight over the two-month extension “may not have been politically the smartest thing in the world”, said John Boehner, the Republican speaker of the House, “but let me tell you what. I think our members waged a good fight.”
Members of both houses have now dispersed back to their districts and the deal needs the unanimous agreement of every member if it is to go through without a vote. It is not clear whether every House Republican will stomach the retreat from a fight they picked at the weekend but, if a vote is needed, it is likely to attract enough Democratic votes to pass.
Without a deal, payroll taxes would have risen from 4.2 per cent to 6.2 per cent, millions of Americans would have lost unemployment benefits and reimbursement to doctors who treat Medicare patients would have fallen by 27 per cent at the start of next year.
The deal was struck after the political costs for House Republicans mounted rapidly on Thursday as their isolation increased. Mitch McConnell, the senior Republican in the Senate, said that the House should pass a two-month extension and Mr Obama seized on the issue.
“This is it; this is exactly why people get so frustrated with Washington,” he said before the deal was struck. “This isn’t a typical Democratic-versus-Republican issue. This is an issue where an overwhelming number of people in both parties agree. How can we not get that done?”
Washington has spent most of 2011 fighting over the US deficit but Congress has spent precious little time looking for ways to get Americans back to work
The payroll tax cut deal counters a threat to the US economy that loomed just as it started to pick up some momentum. New claims for unemployment benefits fell to their lowest level since April 2008 and consumer sentiment rose for the fourth consecutive month, according to data released on Thursday.
The four-week moving average of claims fell to 380,250 – below the 400,000 dividing line that analysts judge to be compatible with robust overall gains in employment – as the number of job cuts declined.
That was offset by downward revisions to economic growth data for the third quarter, which was cut from 2.0 to 1.8 per cent but, as that covers the period from July to September, it says little about the present health of the economy.
A lower estimate of consumption that knocked 0.4 percentage points off the growth rate was the main cause of the cut. It was offset by a 0.2 percentage point rise in business inventories.
“We still maintain that the consumer will stay supportive for growth, especially as hiring improves, albeit modestly, in 2012 but the continuation of the deleveraging process should keep any optimism in check,” said David Semmens, chief US economist at Standard Chartered.