Payroll-Tax Standoff: Why Is It So Hard to Get a Deal?

The standoff over payroll tax cuts, unemployment insurance and pay for Medicare doctors boils down to that age-old dilemma in Washington: how to pay for it all.

Photo: James Manners

While both parties largely agree on the biggest item — the payroll tax break — the nearly $200 billion price tag remains perhaps the biggest hurdle to a one-year deal.

Below are some questions about the standoff and the fight over funding, and how a deal might be reached before the tax break, extended jobless benefits and pay for doctors treating Medicare patients expire at year-end.

What Are the Big Sticking Points in Funding the Tax Bill?

The biggest source of funding from the House Republican plan, about $70 billion, comes from cutting retirement benefits and extending a pay freeze for federal workers.

The second biggest source comes from asking higher-income elderly recipients of the Medicare program to pay more in premiums, to raise $31 billion.

This group already pays higher premiums and opposition by the AARP, the influential advocacy group for the elderly, makes Democrats wary of going along with the idea.

Democrats are also resisting more paycuts for federal workers, who are already working under a two-year freeze backed by President Barack Obama.

The Democrats' biggest revenue raiser initially was a surtax on millionaires, which would have raised at a minimum tens of billions of dollars, depending on the level. Many believe the levy has no chance of winning backing from Republicans in the House.

Senate Democrats abandoned this option, for the time being, when they agreed to a two-month extension, funded by steeper fees to Fannie Mae and Freddie Mac, government-sponsored entities that are the biggest providers of U.S. mortgage financing.

"Even if there's a two-month extension, a longer deal in late February could implode because no one can agree on one crucial issue: how to pay for it," Greg Valliere, an analyst for investors at Potomac Research Group said Wednesday.

Could War Savings Be Used For Funding?

Hundreds of billions of dollars in savings from winding down the wars in Iraq and Afghanistan could come back into the mix. Members of both parties in the past have supported using the savings, criticized as a budget gimmick because the cuts had already been planned, when it suited their cause.

What are Areas of Common Ground?

Revenue raisers that might be to the liking of Democrats and Republicans include auctioning off parts of the broadband spectrum and the boosted fees on Fannie Mae and Freddie Mac.

Closing some tax loopholes, such as the corporate jet tax break, is possible. But up to now Republicans have balked at using any tax measures to reduce the deficit.

One option is not funding the entire bill. This time last year, Congress passed a $858 billion tax deal extending lower individual tax rates, without paying for it, when lawmakers found themselves in a similar brawl.