House Republicans rally around payroll tax plan

WASHINGTON (Reuters) - Republicans in the House of Representatives began to fall into line on Thursday behind a bill to extend an expiring payroll tax break after their leaders sweetened the measure with a provision that President Barack Obama has threatened to veto.

The move to link the popular tax cut to a controversial pipeline project, which Republicans say would create needed jobs, sets the stage for a partisan brawl certain to increase voter disgust with a gridlocked Washington at a time of economic struggle.

Without congressional action by the end of the month, the tax that workers pay to help fund the Social Security retirement program would revert to 6.2 percent from the current 4.2 percent, increasing the burden on millions of American workers and undermining economic growth.

Democrats want to reduce the tax further to 3.1 percent.

Some Republicans have expressed concern that extending the tax cut would undermine Social Security, a concern they say is heightened by the Democrats' plan to lower the rate even further.

Democrats deny that, saying their bill uses other funds to make up the shortfall for Social Security. They also accuse Republicans, who rose to power opposing tax hikes, of being willing to see taxes raised on the middle class, but not on the rich.

As Republicans who control the House rallied around their plan, their colleagues in the Senate blocked a proposal from Democrats to extend and expand the tax cut, and pay for it with spending cuts and a surtax on millionaires.

In turn, Senate Democrats rejected a Republican plan to cover the cost by extending a freeze on the pay of federal workers and reducing the size of the government workforce.

"We just have to keep on trying," said Senator Robert Casey, the chief sponsor of the Senate Democrats' proposal. "I'm as frustrated as anybody."

The jockeying kept prospects for the bill murky, although leaders on both sides of the debate have said extending the tax cut before it expires is a priority.

REPUBLICAN SUPPORT BUILDS

The House bill, which would likely be rejected by the Democratic-run Senate, includes provisions on federal workers that are similar to the Senate Republican version.

It also would require quick approval of the Keystone XL pipeline that is to carry Canadian oil to Texas refineries. Obama has delayed action on the project for a year to allow more time to review its environmental impact.

A number of House Republicans who had been reluctant to support the tax cut extension said their leaders had addressed their concerns.

"Clearly, leadership listened to individuals," said Representative Phil Gingrey, a Republican who had been undecided last week. "I'm going to vote for this."

Obama said on Wednesday he would reject any payroll tax cut legislation that included the pipeline provision even though he and his fellow Democrats in Congress believe extending the tax cut is essential to support the sluggish U.S. economy.

The pipeline provision and veto threat may have led some conservatives to rally around the House Republican plan.

"It never hurts," Republican Representative Kevin Brady said when asked if Obama's veto threat helped galvanize reluctant conservatives. Brady said he expected strong support from House Republicans for the legislation.

The pipeline provision could put Obama, who has been hammering congressional Republicans for blocking his jobs agenda, in a difficult situation. Construction unions, usually a friendly source of votes for Democrats, back the project.

The House is expected to vote on the legislation next week.

The bill also includes an extension of unemployment insurance benefits and a measure to avert a pay cut for doctors treating patients on Medicare, the health program for the elderly.

The payroll tax cut has been popular among voters and analysts say it could be politically perilous for lawmakers to oppose an extension before next year's election.

(Additional reporting by Richard Cowan, Thomas Ferraro and Tim Reid; Editing by Peter Cooney)

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