Democrats Push Payroll Tax Cut Amid Budget Showdown in Congress

New legislation released by Senate Democrats on Tuesday would prolong and increase a payroll tax cut pushed by President Barack Obama, while introducing a de facto millionaire's tax. The proposal is the first step in what will likely be a prolonged budgetary battle on Capitol Hill.

The federal government is currently funded through Dec. 16 by a Continuing Resolution that could lead to a government shutdown if funding is not extended. But a polarized Capitol Hill could make consensus rare.

The Democrats' $255 billion Middle Class Tax Cut act would expand a payroll tax cut paid by employees, currently set to expire at the end of the year. The bill would cut the tax in half from 6.2 percent to 3.1 percent. Democrats also intend on cutting the Social Security payroll tax paid by employers on the first $5 million of payroll by the same amount. The bill represents a major chunk of Obama's currently-stalled $447 billion jobs bill.

Senate Majority Leader Harry Reid, D-Nev., said the cut would put $1,500 into the average working family's pocket, according to the New York Times.

The bill faces stiff opposition from Congressional Republicans, as its funding comes from a 3.25 percent tax on income over $1 million for joint and single filers. They also argue the bill would do little to stimulate the economy.

Republicans have said that extending the payroll tax break is a potential area of common ground, but coupling it with a job-killing tax hike on small businesses makes no sense whatsoever. said Michael Steel, a spokesman for the House Speaker John Boehner, in a statement. It looks like Washington Democrats are playing politics with American jobs -- again.

According to Reuters, some economists have argued an increase in the payroll tax could shrink economic growth, cutting it between .75 and 1.5 percentage points.

Reid plans on holding a test vote later on in the week, according to a spokesman for the Senator, though the measure is expected to fail. Democrats said they would use the issue to test Republicans' resolve.

The Congressional Budget Office estimated the payroll tax cut increases consumer spending and employment in the private sector. The bill also presents the double-whammy of pitting Republicans against tax cuts for mostly middle-income earners and businesses while opposing tax increases for the rich.

The Republicans are giving themselves whiplash on the issue of taxes, said U.S. Sen. Chuck Schumer, according to Bloomberg. The public is starting to figure out that Republicans have one position on taxes when it comes to the wealthy and another when it comes to everybody else.

With No Extension, Payroll Tax to Rise 2 Percent

If the bill does not pass, the payroll tax for workers would jump up 2 percent.

Senate Minority Leader Mitch McConnell, R-Ky., accused Democrats of politicizing budgetary and tax issues.

We should do what we were sent here to do, and that means more bill signings and fewer bus tours, McConnell said, a jab at Obama's efforts to garner support for his jobs bill.

With a potential budget showdown looming, the Majority Leader also hopes to extend government funding via an omnibus bill rather than of stopgap provisions.

We hope to work this process through so we won't do a [Continuing Resolution], Reid said, according to The Hill. We have already passed a number of appropriations bills. We would put all the others into one package and try to get them done.

Congress faces an uphill battle overall, with a number of measures, tax cuts and benefits set to expire, including unemployment benefits, the expiration of the Alternative Minimum Tax, and temporary block to cuts in doctors' Medicare payments. The scope of the problems would be difficult to address in a series of minibus deals, as part of another CR.

We're going to try to have [...] some type of overall bill [and] make sure that there are meetings - which have already taken place in many respects, with subcommittee chairs in the House and the Senate, Reid said.