White House Floats the Notion of Extending and Widening the Breaks to Stimulate Economy; Lukewarm GOP Response.

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The Wall Street Journal
Payroll Tax Cut Idea Joins Debt Talks
By: Damian Paletta & Carol E. Lee
June 15, 2011

President Barack Obama is considering how strongly to push for extending a payroll-tax break for workers and creating a new tax break for employers to jump-start the economy, reflecting White House concerns about joblessness but also complicating efforts to rein in the federal deficit.

White House officials brought up the ideas during closed-door debt talks Tuesday with a bipartisan group of lawmakers, people familiar with the meeting said. They told the lawmakers that the White House would be open to payroll tax breaks for employers and employees, sending a clear signal that fresh concerns over slowing job growth have spilled into discussions about how to reduce the deficit.

Supporters of such tax breaks believe they spur job growth, which could improve the country's fiscal footing over time. But the provisions could make the budget deficit--projected to rise to $1.5 trillion this year--worse in the short term. White House press secretary Jay Carney said Tuesday the tax breaks were "certainly worth looking at."

Vice President Joe Biden said the group had made "real progress" Tuesday in its efforts to craft a budget deficit reduction plan by July 1, which would clear the way for lawmakers to raise the government's $14.29 trillion borrowing limit. Mr. Biden said, "We're down to the real tough stuff now and everybody's still in the room. We're going to meet all week."

Government figures showed that hiring slowed sharply in May and the unemployment rate rose to 9.1% from 9%. Getting the unemployment rate lower is seen as key to Mr. Obama's re-election effort next year.

White House officials could try to woo Republican support for raising taxes on the wealthy by including the payroll tax breaks in a deal. But a Senate Republican aide said there was "no chance" Republicans would accept the payroll tax breaks in exchange for higher tax rates on upper-income families.

In December, the White House and Congress agreed on a deal that cut the Social Security payroll taxes paid by employees to 4.2% of earnings from 6.2% for one year, saving taxpayers as much as $2,136 this year. They did not lower the 6.2% payroll tax rate paid by employers.

The payroll holiday came at an estimated cost of $111.7 billion. Social Security payroll taxes were expected to fall short of covering benefit payments in 2011 by $163 billion. That continues a trend that started in 2009, although the 2011 gap is much larger because of the tax cuts.

The Social Security program's overall income still is expected to exceed overall costs for 2011, due to Treasury payments that cover the tax cut's impact, as well as other income sources.

The Biden group wants their framework to be completed well before Aug. 2, when Treasury officials say the government could begin defaulting on its financial obligations. But so far the White House and Republicans remain far apart on what to do with key issues such as taxes and entitlement programs like Medicare.

White House officials are resisting Republican calls for deep spending reductions this year, warning they could hurt the fragile economy, and have instead called for some tax increases as well to reduce the deficit over time. Most Republicans counter that tax increases would harm the economy and can't be included in any deal.

Federal Reserve Chairman Ben Bernanke warned all sides not to play "brinksmanship" with the debt ceiling, and to conduct the deficit-reduction talks separately. "In debating critical fiscal issues, we should avoid unnecessary actions or threats that risk shaking the confidence of investors in the ability and unwillingness of the U.S. government to pay its bills," Mr. Bernanke said Tuesday.

Treasury officials have warned that failing to raise the debt ceiling could cause interest rates to soar, triggering another financial crisis or recession. But some Republicans are skeptical, and have suggested the White House could avoid a default on the government's debt by making interest payments and cutting back on other spending.

Congressional Budget Office Director Douglas Elmendorf called such a move a "dangerous gamble" because it would be difficult to anticipate the consequences. He said even a minor increase in the cost of U.S. borrowing could force the country to pay $130 billion in additional interest payments over 10 years.

--Janet Hook, Naftali Bendavid and John D. McKinnon contributed to this article.
Write to Damian Paletta at damian.paletta@wsj.com and Carol E. Lee at carol.lee@wsj.com

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