Senate Rejects Rival Payroll Tax Cut Plans as Vote Exposes Split Among GOP

WASHINGTON –  The Senate late Thursday blocked rival Democratic and Republican plans for extending the current payroll tax cut, even as all sides on Capitol Hill continue to promise an eventual compromise on a tax holiday before Congress leaves Washington for Christmas.

The Democratic bill extending the tax cut for an additional year -- to have been funded by a surtax on those earning more than $1 million a year -- won a 51-49 majority, short of the 60 votes needed for passage.

More than two dozen of the Senate's 47 Republicans also voted to kill an alternative plan backed by GOP leader Mitch McConnell of Kentucky in a vote that exposed a wide split among the party over whether renewing an existing 2 percentage point payroll tax cut makes sense.

The defeat of the competing plans came as House Speaker John Boehner, R-Ohio, said for the first time that renewing the payroll tax cut would boost the lagging economy, a view many in his party don't share. Sen. Jerry Moran (R-Kan.) said his opposition to the plan was due to the cost. "When are we going to admit that we are broke?" he said. "We are putting off difficult decisions and leaving it up to our children and grandchildren to pay for our irresponsibility."

The payroll tax cuts and unemployment benefits are at the center of a costly, politically-charged year-end agenda in which Democrats seem poised to prevail in renewing a tax cut that many Republicans back only reluctantly. But Republicans are insisting -- in a switch from last year -- that the payroll tax cut and jobless benefits be paid for by cutting spending.

Both parties are seeking the political high ground as next year's elections loom, with Democrats accusing Republicans of siding with the rich, and Republicans countering that Democrats were taxing small business owners who create jobs.

The White House issued a statement by Obama that accused Republicans of voting to raise taxes on 160 million people because they "refused to ask a few hundred thousand millionaires and billionaires to pay their fair share." The statement didn't mention the GOP alternative.

In a surprising result, Democrats and more than two dozen Republicans voted 78-20 to kill the $120 billion GOP alternative that would have simply extended the existing 2 percentage point payroll tax cut, financed by freezing federal workers' pay through 2015 and reducing the government bureaucracy.

Senate Majority Leader Harry Reid said Republican opponents "insist on helping the very wealthy while turning their back on the middle class," while another member of the leadership, Sen. Charles Schumer, D-N.Y., said Republicans were in full-blown retreat just days after Sen. Jon Kyl, R-Ariz., said on "Fox News Sunday" that "the payroll tax holiday has not stimulated job creation. We don't think that is a good way to do it."

On Thursday, however, Boehner disagreed.

"I don't think there's any question that the payroll tax relief, in fact, helps the economy," Boehner said. "You're allowing more Americans, frankly, every working American, to keep more of their money in their pocket. Frankly, that's a good thing."

House Republicans are set to meet Friday morning to decide how to proceed on the payroll tax issues, and that session could reveal how deep the division is on the issue within the GOP in that chamber.

Boehner made clear that all costs must be paid for, and said higher taxes were a non-starter.

"Republicans are ready to work with the president and the Democrats to extend the payroll tax cut and unemployment insurance temporarily, but they must be offset with spending cuts elsewhere," he said.

A meeting between Boehner and Reid produced no progress, aides said, and House Republicans were considering a GOP-tilting version of the measure before Congress would settle on an eventual compromise that might not pass until just days before Christmas.

But Thursday's votes indicated there was lots of reluctance among Republicans to renew the costly payroll tax cut, which even some Democrats said hasn't much helped the economy.

"I can't find many people who even know that they're getting it, okay?" said Sen. Joe Manchin, D-W.Va., who opposed both plans. "So with that being said, we're going to double down on something that we thought should have worked that didn't work."

There were other issues under negotiation as lawmakers looked toward the end of a highly partisan year, the first in a new era of divided government.

Boehner said lawmakers were discussing a bill to avoid a scheduled 27 percent cut on Jan. 1 in reimbursement rates for doctors treating Medicare patients.

The two parties also looked for agreement on a measure to fund the government through the Sept. 30 end of the budget year

Boehner added that he likely would try to include some of the 20 House-passed bills that are part of a GOP jobs package in one of the year-end wrap-up bills. Most of the measures would block federal regulations on various industries, and are stalled in the Senate.

With unemployment hovering around 9 percent nationally, Obama urged Congress in September to renew and expand the Social Security payroll tax cut for workers that he signed a year ago, and called as well for an extension of benefits that can cover up to 99 weeks for the long-term jobless.

State unemployment insurance programs guarantees coverage for six months, but as in previous downturns, Congress approved additional benefits in 2008. Expiration of those payments would mean an average loss of $296 in weekly income for 1.8 million households in January, and a total of 6 million throughout 2012.

On the tax cut extension, Republicans prefer a simple one-year continuation of the existing law, jettisoning Obama's call to deepen the cut to 3.1 percentage points on workers' first $106,800 in earnings, while expanding it to cut in half employers' Social Security contributions for their $5 million in payroll.

To pay for the measure, Senate Republicans proposed freezing federal workers' pay through 2015 -- extending a two-year-freeze recommended by Obama -- and reducing the bureaucracy by 200,000 jobs through attrition.

The Democratic plan would give a worker earning $50,000 a more than $1,500 tax cut; the GOP plan would provide a $1,000 tax cut for such an earner. A two-income family making $200,000 would reap a $6,000 tax cut under the Democratic plan and a $4,000 tax cut under the GOP version.

The Associated Press contributed to this report.