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The GOP Payroll Tax Cut/UI Extension Proposal

“will they finally hold the line on their own promises this time, or will they pass all the extensions without the reforms, riders, and spending offsets? This package must be the final offer.”

Earlier today, House Republican leaders unveiled their package deal to extend the payroll tax and unemployment benefits for another year and to continue Medicare ‘doc fix’ for another two years.

While bipartisan passage of the payroll tax cut and doc fix were a forgone conclusion, the real issues for conservatives were the UI extension and the spending cuts.  Unfortunately, they are acquiescing to another extension, albeit with some reforms.

The major reforms include allowing states to set mandatory drug testing and participation in reemployment services as a condition for receiving benefits.  In addition, long-term benefits would be immediately reduced to 79 weeks from 99, and would be further reduced to 59 weeks by mid-2012.  Also, states would be authorized to use some of the funds for job training programs.  The UI component of the bill falls short of transformational reform, but at least it precludes 99 weeks from becoming the standard duration of payments.

In order to ameliorate yet another welfare extension for conservative members, two more sweeteners were added: 1) A law to force Obama’s hand on the Keystone Pipeline 2) A provision that would keep illegal immigrants from receiving the refundable portion of the Child Tax Credit, by requiring that recipients provide a valid SSN.  This would save $10 billion over 10 years, according the GOP sources [more background on that issue here].  The bill also has a provision to reduce Clean Air Act regulations for industrial boilers.

The proposal, which includes the aforementioned three extensions, will cost about $200 billion.  Republicans say they will pay for it with the following reforms, many of which were adopted from the Senate Republican proposal:

  •  Extend the current two-year freeze on federal employees’ salaries from 2013 through 2015 and expand it to apply to employees of the legislative branch, including members of Congress.
  • Reduce the number of federal employees by 10% through attrition.  This would follow the framework of the Simpson-Bowles proposal to only allow the hiring of one new employee for every three who leave the federal workforce.  These reforms would be achieved by lowering discretionary spending caps another $3-4 billion per year, from 2013-2021.  This would save about $26 billion in discretionary spending over and beyond the savings achieved from the spending caps in the Budget Control Act.
  • Cut some benefits to those individuals with an adjusted gross income over $1 million.  They take some ideas from Senator Coburn’s report, such as cutting unemployment benefits for millionaires, and charging them higher premiums for Medicare part B and D (the parts that are not funded through payroll taxes).  The Medicare savings would total $31 billion over ten years.  They also propose closing an anomalous loophole that allows certain rich people to collect food stamps.  These latter proposals will save very little.
  • GOP leaders are pledging to eliminate some unspecified Obamacare spending, which, along with the aforementioned healthcare reforms, would pay for the $39 billion price-tag of the two-year doc fix.

Some other provisions include the following (from the Speaker’s website)

  • Changes the co-pay structure for civilian federal retirees (saves $36 billion).
  • Raises Government Sponsored Enterprise (GSE) guarantee fees to better price the risks GSEs cover and reduce their unfair advantages over the private sector (saves $38 billion).
  • Includes spectrum auctions and other reforms to bring in significant revenues for taxpayers by making more efficient and effective use of the public’s airwaves (saves $16 billion).
  • Reforms the National Flood Insurance Program by eliminating the pre­mium subsidy for certain properties (saves $4 billion).

While all these ideas are meritorious, I would point out that most of the $200 billion shortfall from the extension package (roughly $120 from the payroll tax cut, $35 from UI [that number is probably low], and the rest from doc fix and small business tax expensing) will be incurred next year (or over two years, in the case of doc fix), while the overwhelming majority of the savings ($173 billion, according to CBO) will occur during subsequent years.  If Republicans fail to conjure up some more mettle over the next few years, it is likely that these measures will continue to be extended at a cost of well over $2 trillion. Moreover, I’m a bit skeptical of optimistic predictions of reduction in federal employees, and by extension, deficit reduction, when those predictions are born out of random hiring freezes, as opposed to actual elimination of programs or agencies.  As long as the program or agency exists, it will somehow find a way perpetuate a need to retain its employees.

Let’s face it; this is not the type of thinking that will bend the trajectory on our unsustainable mandatory spending and our $15 trillion debt.

Nevertheless, I would totally support this package.  When judged together with the sweeteners, the UI reforms, and some of the cuts, this is a reasonable compromise.  As conservatives we would have rather they fight against another UI extension.  We would have also preferred an authentic one-year offset, at least for UI and doc fix, but at least we got a legitimate compromise, not just a capitulation.

However, we still need to answer the million dollar question.  When Democrats inevitably refuse to pass the GOP package, will they finally hold the line on their own promises this time, or will they pass all the extensions without the reforms, riders, and spending offsets?  We’ve been down this road before, where leadership entices conservatives into supporting a watered-down, but satisfactory plan, only to pocket the support and completely cave to the Democrats.  They haven’t been willing to go to the brink on spending bills when it came time to defund Obamacare and EPA rules.  Will this time be different?

Before conservatives lend their support to this extension package, they should secure a guarantee from leadership that they will hold the line on most of the riders and reforms.  This package must be the final offer.

Let’s not get played like fools once again.

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