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Some Republicans could cede payroll tax cut to Obama

By Rachelle Younglai and Kim Dixon

WASHINGTON (Reuters) - In a turnabout from a year ago, some Republican lawmakers say they are open to backing President Barack Obama's proposal to extend the payroll tax cut for a third year, possibly bringing the sides closer to a deal to avoid the fiscal cliff.

Last year Speaker John Boehner, the leading Republican in the House of Representatives, suffered through a revolt by ultra-conservative Republicans opposing the cut. They argued cutting the payroll tax would add to the deficit and hurt the retirement program it helps finance.

That was last year. This is this year.

"It depends on how it is put out, said New York Representative Tom Reed, one of the Republicans who opposed a Boehner-brokered deal to extend the cut last year. "I think lower taxes is always better policy, so we are interested in looking at lessening the tax burden on all Americans."

Introduced by Obama two years ago as an economic stimulus, the tax holiday reduced an employee's share of the payroll tax from 6.2 percent to 4.2 percent, giving workers an extra few dollars to spend and possibly help get the U.S. economy back on its feet.

The nonpartisan Tax Policy Center estimates that expiration of the payroll tax cut will raise taxes an average $700 per household.

"I feel like we are in a bind," Representative John Fleming, a member of the conservative Tea Party Caucus, said on Tuesday. The Louisiana Republican said he was torn between what the tax break was "doing to our trust fund and the need to keep money in the pockets of Americans."

The payroll tax cut was meant to be temporary and is now set to expire on December 31 together with other lower income tax rates. They are key elements of the so-called fiscal cliff, a combination of tax increases and automatic spending cuts that risk triggering another recession.

Last year's tug-of-war with Obama turned into a public relations headache for Republicans, who were in the unusual position of opposing a tax cut that benefits the middle class. They said they were worried about the impact on the deficit and social security funding, but relented to a year-end extension, albeit grudgingly.

Obama proposed extending it further when he put forward his proposal for avoiding the fiscal cliff last month.

Many Republicans - along with some senior Democrats - oppose the extension, in part because it funds the Social Security retirement program.

SOCIAL SECURITY

The Social Security fund is on track to start going bankrupt in 2033 and Democrats and Republicans agree that the program has to be altered to ensure that retirees are not left without pension checks.

Boehner has not publicly ruled out an extension of the payroll tax holiday. Should he accept the White House request as part of a deal, he will need support from rank and file Republicans in the House of Representatives.

Ohio Representative Jim Jordan, leader of a large group of House conservatives, said if lawmakers were asked to simply vote on the extension, he would vote for "keeping it because I view it as a tax cut."

At the same time, Jordan said the tax should eventually revert back to 6.2 percent in the context of a broad reform of Social Security.

Representative Steven LaTourette, a moderate Republican from Ohio, said he would be open to a payroll tax extension if it was part of a package that would include a minimum of $4 trillion in deficit reduction over 10 years.

In the Senate, Republicans Rob Portman of Ohio and Jon Kyl of Arizona also did not rule it out and said support of an extension would depend on the final deal. "Everything depends on what's in the package and how it all works together," Kyl said.

Ron Johnson, Republican senator from Wisconsin, said: "I support extension of all current tax rates, that's what we should be doing."

(Additional reporting by Alina Selyukh; Editing by Howard Goller and Cynthia Osterman)

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