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Payroll tax uncertainty

By Kay Bell · Bankrate.com
Monday, December 19, 2011
Posted: 2 pm ET

If you ever had any doubt that things in Washington, D.C., work -- or don't work -- differently from the rest of the world, the latest turn in the payroll tax cut extension makes that very clear.

The payroll tax collected from workers to finance Social Security is usually a 6.2 percent rate. In 2011, it's been just 4.2 percent. But on Jan. 1, 2012, it's scheduled to go back up those 2 percentage points unless Congress extends it.

Conventional wisdom has been that Congress would keep the reduced rate, at least through the 2012 election year.

But wisdom, conventional or otherwise, is not a word associated with Congress, at least not lately.

Now I'm not a big fan of the payroll tax rate cut. I don't think it's doing much for the economy; have you seen a marked uptick in these last 11½ months because folks have had a few more dollars of income each paycheck?

And since I'm relatively close to retirement, I'd like to make sure Social Security is around for as long as I am.

However, I understand the need by many folks for as much take-home pay as possible. And it seemed like Congress did, too.

The Senate agreed on Saturday to keep the 4.2 percent rate in place, but only through February. They said they'd hash out a full-year deal when they return next year for the second session of the 112th Congress. The Senate recessed this past weekend following the payroll tax vote.

And it looked like the House would go along.

Now, however, the acceptance of the two-month extension of the payroll tax rate cut is in jeopardy.

House Speaker John Boehner, who reportedly first lauded the deal as a victory because it included provisions forcing the president to make a decision on the controversial Keystone oil pipeline, changed his mind.

After hearing from some of his more conservative Republican colleagues, Boehner now wants to change the Senate bill so that the payroll tax rate cut is good through 2012. Not a bad idea, you say.

But any changes to the Senate bill will mean that the Senate would have to agree to the changes. And, as I noted, the Senate is in recess until next year.

Senate Democrats say they're not coming back. If the Republicans in the House want to kill the payroll tax cut, say the Dems, then those Republicans will just have to answer to their voters.

So what will happen? Will Boehner and his supporters in the House have their way? Or will a majority of Representatives want to join the Senate on Christmas break and agree to the Senate's two-month payroll extension?

If I knew the answer, I'd be cashing in on my crystal ball abilities and sitting on a Caribbean beach right now. But this politically polarized Congress has been particularly hard to predict when it comes to tax legislation.

What would you like your lawmakers in D.C. to do? Have you let them know?

Find out when (or if) Congress OKs the payroll tax rate cut for 2012 by subscribing to Bankrate's free Weekly Tax Tip newsletter. And get ready. When high tax season arrives in January, Bankrate's Daily Tax Tip newsletter will return, too. You can subscribe to one or both of the tax newsletters.

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