The Senate-passed payroll tax cut extenders package was already on the ropes with House Republicans over the weekend.  The bill (HR 3630) offers a pathetic two-month extension of the payroll tax cut.  In addition, it extends long-term unemployment benefits for the ninth time, along with the annual Medicare doc fix.  The bill gutted all House-passed reforms to medicare and unemployment insurance, while offsetting the cost through phantom revenue increases generated through Freddie and Fannie.  Reliance on these fees for spending offsets will actually make it more difficult to close down these harmful entities.

Today, we are discovering two more problems with the Senate package:

1) Earlier today, Senators Brown, Heller, and Lugar blasted House Republicans for holding up the short-term deal.  “There is no reason to hold up the short-term extension while a more comprehensive deal is being worked out,”cried Heller.  Well, here is a good reason.

Aside for the obvious vices of a two-month payroll tax extension, this tenuous law will make life difficult for providers of payroll processing services.  Section 101 of the legislation establishes a new Social Security Taxable Wage limit of $18,350.  All wages in excess of $18,350 for January and February will be taxed at the old rate of 6.2%.  This provision was inserted in order to preclude those with high incomes from meeting their full payroll tax obligation during the first two months.  Such an eventuality would create a disparity in which middle-income earners, who would still incur a payroll tax liability after February, would pay a higher rate (6.2%) on the rest of their income than high-income earners would have to pay.  Many high-income earners receive large bonuses at the beginning of the year, and Democrats were not about to let them take advantage of this short-term payroll tax cut.

Now, the National Payroll Reporting Consortium (NPRC), a trade association representing payroll processing companies, is charging that this provision is untenable.  Such a drastic change would force payroll processors to implement significant changes to their program software.  In a letter sent to the chairmen of the tax-writing committees obtained by Jake Tapper, NPRC’s president warns that there is not enough time to implement these changes before January.

A full 12-month extension would obviate the need for this wage limit, thereby sparing payroll processors the two-month headache.  Unfortunately, Senator Brown excoriated House Republicans for fighting the Senate bill, calling their “plan to scuttle the deal to help middle-class families” “irresponsible and wrong.”  The only thing irresponsible and wrong was his vote for an inane two-month extension.

2) In addition to the three major provisions of the extenders package, the bill also extends Temporary Assistance for Needy Families (TANF), which is set to expire at the end of the year.  TANF is the main cash payment welfare program, which is typically extended on a temporary basis, at an annualized cost of $16.5 billion.  Throughout the year, Republicans have been trying to reinstate some of the welfare reforms that Obama jettisoned as part of the stimulus in 2009.  In the House version of the extenders package, they inserted a provision that prohibited TANF funds from being accessed at ATMs in strip clubs, liquor stores, and casinos.  The Senate made sure to strip out that provision.

At this point, Boehner wants to go to conference with the Senate to work out a deal.  I’m concerned that conservatives would get railroaded in such a process, as they always are.  A better idea would be to end this insanity of tying a tax cut to entitlement spending.  As we advocated yesterday,  they should pass a clean payroll tax cut extension in a separate bill from the UI extension and other provisions.  All of the policy riders, reforms, and spending offsets should be in the spending bill, not in the tax cut bill.  It’s time to stand and fight.

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