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Congress prepares for year-end spending and tax cut bazaar

Jonathan Ernst / REUTERS file

Harry Reid, center, hasn't ruled out other ways of offsetting the revenue loss caused by the payroll tax cut, if Republicans succeed in blocking the surtax.

Over the next few weeks, Congress faces a sprawling mess of tax and spending decisions, with the likely outcome being an overstuffed pre-Christmas package held together with the legislative equivalent of wrapping tape.

Complain if you will about congressional gridlock, but right before the holidays is often when the gridlock eases because everyone is focused on getting out of town and back to their families.

This week is merely the opening round of the bargaining. The decisive question: What tradeoffs will members of Congress be willing to make as the clock ticks down to the middle of the December?

This week’s action focuses on Senate votes to extend the Social Security payroll tax cut which Congress passed almost exactly one year ago in a similar end-of-year bargaining bazaar. Without the extension, a worker who earns $40,000 would see his or her payroll tax go up by $800 in 2012.

“Republicans know that raising taxes on the middle class is the wrong thing to do,” said Senate Majority Leader Harry Reid Tuesday after the weekly strategy luncheon with his Democratic colleagues.

Democratic leaders propose to pay for an expansion of the payroll tax cut with a surtax on incomes over $1 million, an idea Republicans oppose.

On Tuesday, Reid didn’t rule out other ways of offsetting the revenue loss caused by the payroll tax cut, if Republicans succeed in blocking the surtax. “We are going to continue working until we get the payroll tax (cut) extended,” Reid said.

Reid also didn’t rule out simply passing the tax cut without any offsetting revenue raiser. “Let’s see what happens on this (surtax vote),” he said.

Sen. Chuck Schumer (D-NY) lays the reasons why he thinks "we have a good chance of actually getting a good package for deficit reduction in 2012."

Senate Republican Whip Jon Kyl said Sunday that the payroll tax cut “has not stimulated job creation.” But on Tuesday two other Republicans from opposite ends of their party’s ideological spectrum indicated they weren’t opposed to the payroll tax cut.

“I don't like toying with taxes the way we are doing,” said Sen. Jim DeMint, R-S.C. But he added, “I just don't think it's a good time to increase any taxes, so we're looking for a way to pay for it.”

And Sen. Olympia Snowe, R-Maine, voiced support for extending the tax cut, but wasn’t too enthusiastic about it. “What I've heard from employers is that a one-year policy isn’t going to be sufficient” to create sustainable employment, she told reporters. The payroll tax cut is “a short-term measure that’s not going to achieve the long term results … We should be doing more long-term policy of fundamental structural (tax) reforms … .” But despite talk of the long term, Congress now seems able only to legislate for a year at a time.

Senate staffers on both sides of the aisle indicated that the payroll tax cut extension will probably pass, after some theatrics, assuming some revenue offset is found.

The other must-pass contents of the end-of-year package that Reid mentioned Tuesday included:

1. An extension of emergency unemployment insurance benefits which currently provide up to 53 weeks of additional money after the regular 26 weeks of state payments have been exhausted. Of the dozen policy options, including the payroll tax cut, which Congressional Budget Office director Douglas Elmendorf examined in his Nov. 15 testimony to the Senate Budget Committee, extending unemployment benefits was the most cost-effective way of creating additional employment. That might sound paradoxical, but he said, “Households receiving unemployment benefits tend to spend the additional benefits quickly, making this option both timely and cost-effective in spurring demand for goods and services, and thereby economic activity and employment.”

2. The postponement of the scheduled 29 percent cut in payments to doctors serving Medicare patients. The cut in payments to doctors is a result of the 1997 budget law, which attempted to restrain Medicare spending.  But each year since 2003, Congress has overridden the reduction in payments and allowed the postponed reductions to accumulate. So if Congress fails to act, doctors next year will see a sharp cut in what they get paid for treating Medicare patients

3. The extension of at least some of the 53 tax credits and preferences which Congress created or preserved last December. The platter of tax breaks includes something for almost all tastes: the deduction of state and local sales taxes, which is worth about $2.8 billion to taxpayers who itemize, the economic development credit for American Samoa, worth about $15 million, a tax break for mine safety equipment, worth about $20 million, and many others.

With the holiday break approaching, Congress still has plenty on its plate including avoiding big pay reductions for Medicare doctors and avoiding another government shutdown. NBC's Luke Russert reports.

Almost certain to be in the final package is a “patch,” or one-year adjustment, of the Alternative Minimum Tax, which will otherwise hit upper-middle class people who have lots of deductions. The current AMT “patch” is providing about $136 billion of tax relief, according to the Joint Congressional Committee on Taxation.

The vehicle for all this is likely to be a bill providing funding for the agencies and departments for which Congress hasn't yet passed annual appropriations bills. The current funding runs out on Dec. 16 but Congress could pass a stopgap extension and then a longer-term one before it adjourns for the year.

If the package does pass, the budget deficit in the current fiscal year may not be any smaller – and depending on economic growth, may be bigger than the Fiscal Year 2011 deficit of 8.7 percent of Gross Domestic Product . Despite the attempt to “pay for” the payroll tax cut with some offsetting revenue, the other elements in the package are all revenue losers