12/14/2011 02:02 pm ET | Updated Dec 14, 2011

Payroll Tax Cut Fight Prompts Government Shutdown Threat

WASHINGTON -- Senate leaders again raised the specter of a federal government shutdown Wednesday in the latest round of partisan brinksmanship over the fight to extend the payroll tax cut.

"The most immediate concern at this point is, despite the federal funding expiring two days from now on Friday night, my friend the majority leader is blocking action on the funding bill that would keep the government open," Senate Minority Leader Mitch McConnell (R-Ky.) said on the Senate floor, referring to Sen. Harry Reid (D-Nev.).

The government runs out of funding on Dec. 16. Few observers expected that date to spark another shutdown fight, since House and Senate lawmakers had finished most of the work on the so-called omnibus bill designed to keep Washington running.

But now a move to extend the 2 percent payroll tax holiday is suddenly getting in the way, after the House passed a GOP measure to do that Tuesday packed with items the Democrats see as poison pills. Senate Democrats want to pass a 3.1 percent cut, paid for by a surtax on income above $1 million, and believe that they have overwhelming public support on their side.

Although McConnell warned lawmakers of the threat of a government shutdown, Reid argued that he was being disingenuous and had placed himself in an odd position. One day earlier, McConnell demanded an immediate vote of the House payroll cut bill. After it passed, however, he turned down Reid's request to bring it to the Senate floor. Democrats need to hold a vote on it so that they can dispatch the GOP-supported bill and begin pursuing a compromise that they find more acceptable. McConnell saying no, they argue, shows he's not really interested in reaching a deal or getting the government funded.

"My friend is living in a world of non-reality," Reid said, speaking just after McConnell. "I think that everyone can see very clearly that my friends on the other side of the aisle obviously want the government to shut down," he added, linking the current GOP leaders to the infamous government shutdowns that occurred in the 1990s under the watch of then-House Speaker Newt Gingrich.

"They have had experience doing this," Reid said. "That presumptive Republican nominee, Newt Gingrich, tried that once. It didn't work so well. so I don't think it's going to work very well again."

McConnell insisted that it was better to vote on the government funding bill first, because it was ready to go. Democrats have objected, publicly arguing that there were unresolved issues involving legislation relating to Cuba and environmental policy. Privately, they believe House Republicans will leave town after the government funding bill is passed, leaving Senate Democrats with an unenviable choice: pass the GOP version of the payroll tax cut extension or nothing at all.

One Democratic aide joked that it was turning into “a mutual assured destruction scenario.”

With the legislative action at a momentary standstill and the government set to run out of money by Friday night, Democrat are gaming out several possibilities.

The most likely scenario is the one currently being pursued. Reid has begun the process of bringing the House Republican payroll tax scheme to the Senate floor through normal procedures. But without any help from Republicans, that bill will only get a vote on Saturday, after a potential shutdown.

A second possibility is to pass the short-term continuing resolution that Reid wants the House to send over to keep the government open while lawmakers keep talking. McConnell objected to proceeding immediately to such a measure in the heated back-and-forth on the Senate floor.

Democrats don't currently see a way to force his hand and get something done by the time the government runs out of money on Friday. Continuing Resolutions originate in the House of Representatives. Even if one was brought up to the Senate through regular order, a Democratic aide suggested that McConnell would be able to corral his members to deny it the 60 votes needed to cross procedural hurdles.

Moreover, sources said Reid and House Speaker John Boehner (R-Ohio) are not even talking, and a GOP aide suggested the House is unlikely to send a continuing resolution. "There's a bipartisan, bicameral spending bill ready to go," the aide said.

Boehner's office sent out a press release blaming Democrats, saying they should just pass the spending bill. "President Obama and Senate Democrats are holding hostage a bipartisan agreement that would keep the government running," the release said.

There are a few other options for Reid. He could try and attach an agreeable version of the payroll tax cut extension to the omnibus spending bill. But that bill is already nearly finished being "conferenced" to make the House and Senate versions agree with each other, and if it were to come to the Senate as a conference report, it could not be amended.

Democrats in the conference committee could try to attach a payroll tax cut before sending it to the House and Senate, but that might irrevocably compromise the $1 trillion measure, ruining any chance of a long-term solution to spending wars that pop up every half-year.

"The people in the conference could put it in but that would be difficult to do," explained one leadership aide. "Republicans would object to it."

There is also the option of simply punting on the payroll tax cut until early next year, even though President Obama and Reid have both vowed they would work through the Christmas break to extend the cut.

Under this scenario, Democratic leadership will allow for the omnibus to pass and then simply head home. Workers would soon see their paychecks cut by 2 percent, and if, as the White House has insisted, Republicans would face criticism for letting the payroll tax cut expire, they will likely be eager to return to D.C. quickly to resolve the issue. This option, however, has obvious and dangerous pitfalls.

"What in the last year and a half would suggest to you that that's something you can take to the bank?" said one senior administration official. "Our view is it should get done before they go and we shouldn't let it expire and doing so, without having it locked in and done, in addition to having it impact people's paychecks -- and there are many people in this country living paycheck by paycheck -- it puts a lot of uncertainty in the economy."

"There is no reason to do it unless they are desperately in need of a longer vacation," the aide continued. "The Democrats have committed to staying here as long as it is needed to get done and our hopes are Republicans will do the same."

Then, there is the fact that House Republicans passed their own payroll tax cut extension Tuesday night. If Reid were to let lawmakers leave without matching or coming to a legislative agreement with Boehner, it would be Democrats who would be blamed for letting the tax cut lapse.

"It is not a complete win for us anymore now that they have passed it," said one Democratic Hill aide. "In fact, the optics will be awful."


Nine Poison Pills In The GOP Payroll Tax Extension Bill: