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How Failure to Extend the Payroll Tax Cut Would Affect Consumers

David Francis

Much of the time, it seems like the infighting in Washington has little impact on day-to-day life. Republicans and Democrats can't agree on anything, but it's more political theater than a process that will have an immediate or short-term impact on the average American.

But what's happening on Capitol Hill during an otherwise quiet week before Christmas is different.

This week, Republicans and Democrats are at a stalemate over the extension of the payroll tax. Republicans in the House of Representatives have just rejected a bill that would extend a payroll tax cut for 160 million Americans and unemployment benefits for many millions more. The Senate drafted a bill that would allow these benefits to be extended for two months in the New Year, giving Republicans and Democrats a chance to hash out an agreement over a longer period of time.

[See 7 Problems That Could Derail the Global Recovery.]

Over this past weekend, it appeared as if an agreement was close. Republicans demanded the bill include a provision for the president to review plans for a gas pipeline linking Canada and the Gulf of Mexico. The Senate relented on that point, but under pressure from the Tea Party branch of the Republican Party, House Speaker John Boehner and other party leaders backed away from the Senate plan. They are now demanding negotiations between the Senate and the House in the days before Christmas to discuss extending the tax cut and unemployment insurance for a whole year. According to reports, however, Republicans are now leaving town for the Christmas holiday.

"Our members believe that we passed a reasonable, responsible bill that would extend the payroll tax credit for a year," Boehner said. "Our members do not want to just punt and do a two-month short-term fix where we have to come back and do this again."

The Republicans' rejection of the deal brought a swift rebuke from the White House. "Let's not play brinksmanship," said President Barack Obama. "The American people are weary of it. They're tired of it ... I'm calling on the speaker and the House Republican leadership to bring up the Senate bill for a vote and give the American people the assurance they need in this holiday season."

[See 3 Homegrown Obstacles to the U.S. Economic Recovery.]

Impact on consumers. The politics of this debate might be typical, but the results of inaction would have a direct impact on consumers. The payroll tax extension affects 160 million Americans. If not extended, it would cost a person or family making $50,000 a year about $1,000 in tax breaks in 2012. A person or family making $75,000 a year would pay an extra $1,500.

This is discouraging news, considering the fragile state of the economy. Reports have shown that during the recent downturn, Americans were saving more and spending less. With an increase in taxes, it will be more difficult to find money to put away.

This is also bad news for the long-term unemployed. Without an extension of benefits, many people who have been looking unsuccessfully for jobs for long periods of time will be left without a safety net. And while the job picture has been improving, 8.6 percent of Americans are still without a job.

[See With No Jobs At Home, Some Americans Look Overseas.]

Frustration mounting. According to a Washington Post-ABC News poll released this week, the majority of Americans disapprove of the way both parties are conducting business, a first since the mid-1990s.

But politicians are seemingly oblivious to the dissatisfaction of Americans. Twice in 2011, political brinkmanship had a direct impact on the financial health of the country. In August, Standard and Poor's downgraded U.S. debt because of a lack of faith in politicians to work together. This took the steam out of the news that the U.S. economy began a soft recovery last spring. It also sent the stock market down sharply.

Now, the failure to move forward on the tax and unemployment benefit extension is likely to cost consumers again. If a compromise is not reached, it will change spending patterns for many Americans, while heaping additional hardship on the unemployed.

[See How Americans Are Rethinking Prosperity.]

If there's any sign of hope for compromise, it's coming from Republicans in the Senate. Many are facing tough re-election campaigns in the coming year, and recognize that actions that hurt consumers are unpopular with voters.

"There is no question we need to extend the payroll tax cut and unemployment insurance for the entire year ... However, there is no reason to hold up the short-term extension while a more comprehensive deal is being worked out," said Senator Dean Heller, a Republican from Nevada. "What is playing out in Washington, D.C., this week is about political leverage, not about what's good for the American people."


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