Payroll Tax Free for All

The Senate-passed bill is a two-month extension of the 2 percent payroll tax holiday, federal support of unemployment benefits and an extension of expiring Medicare provisions.

The bill is passed by the Senate on an 89-10 vote. The House is expected to take action as early as Monday, but rank-and-file Republicans are pushing back, instead arguing for a year-long extension with different offsets, said Edward Mills, an analyst at FBR Capital Markets.

Mills said a full-year extension remains the base case but it is unclear how it will be paid for. The current deal is offset with increases of mortgage fees.

Democrats have called for a surcharge on individuals earning more than $1 million, which has been unacceptable to Congressional Republicans. Republicans have abandoned their traditional orthodoxy on taxes with their demands to pay for an expiring tax provision.

The Senate-passed bill would be paid for with a 10 basis point increase on all Fannie Mae, Freddie Mac, and Federal Housing Administration (FHA) mortgages.

Mills said the Fannie Mae and Freddie Mac increases would be accomplished by an increase in their guarantee fee (g-fee); the increase for FHA loans comes in increased insurance premiums. All increases will be phased in over two years.

The Senate-passed bill includes a provision that forces a Presidential decision on the Keystone XL within 60 days, unless he determines that it is not in the national interest.

If the President takes no action, the permit would be considered approved. White House and Congressional Democrats have emphasized that the President is likely to reject the pipeline without the additional environmental reviews.

If the President finds approval not to be in the national interest, Congressional Republicans have promised to address the issue when the short-term payroll tax extension is considered for further extension.

The Senate bill did not include extensions of expiring renewable energy tax credits including the 1603 cash-grant program (December 31, 2011) and the production tax credit for wind (December 31, 2012).

We expect renewed efforts at retroactive extension closer to spring 2012, with an extension of the payroll tax cuts beyond two months as a possible vehicle, said Mills.

Mills said the fight over the extension of the payroll tax credit and unemployment benefits does not set a positive precedent for the extension of the Bush-era tax cuts at the end of 2012. The brinkmanship and lack of ability to compromise make it increasingly likely that any final compromise on the Bush-era tax cuts will have to wait until 2013.