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Political clashes coming over budget, payroll tax cut

By Tom Cohen, CNN
updated 12:34 PM EST, Sun February 12, 2012
Jack Lew:
Jack Lew: "I know there are people working hard" trying to resolve the dispute over extending the payroll tax cut.
STORY HIGHLIGHTS
  • NEW: Rep. Ryan expects a payroll tax deal, but blames Democrats for stalling
  • White House chief of staff Lew won't predict a deal on extending the payroll tax cut
  • President Obama will present his 2013 budget plan on Monday
  • Election-year politics reduce the chances of any breakthroughs on major issues

Washington (CNN) -- President Barack Obama's new chief of staff on Sunday stopped short of predicting Congress would agree to extend the payroll tax cut for the rest of 2012.

The issue, a top priority of the Obama administration and the focus of congressional negotiations in recent weeks, reflects the sharp partisan divide permeating Washington as Obama prepares to unveil his 2013 budget proposal on Monday.

Jack Lew, the former White House budget director who just took over as chief of staff, told CNN's "State of the Union" that Congress should resolve the dispute over extending the lower payroll tax rate from 2011.

When pressed about whether a deal would get done, Lew refused to predict success.

"I believe it should get solved, and I know there are people working hard even this weekend trying to solve it," said Lew, who appeared on CNN and four other network and cable talk shows the day before Obama releases his budget plan for next year.

Both the budget proposal and the payroll tax issue continue a political debate over government spending that has dominated Washington since the 2010 congressional elections in which Republicans took control of the House and reduced the Democratic majority in the Senate.

Obama's budget proposal will forecast a $901 billion deficit in 2013, and includes plans to make targeted investments in areas like infrastructure while increasing taxes on the wealthy.

The White House bills the document as a "blueprint for how we can rebuild an economy where hard work pays off and responsibility is rewarded."

Given the intense acrimony in Washington, especially on budget issues, few provisions in the document are likely to become law in an election year.

A protracted political fight in December brought a two-month extension of the lower payroll tax rate from last year, giving Congress more time to work out a longer-term deal.

However, the same political arguments from December continue to stymie talks being held by House and Senate negotiators.

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Obama and Democrats are pushing for an extension with no strings attached, while Republicans seek to tie more spending cuts and other priorities to the plan.

House Budget Committee Chairman Paul Ryan, R-Wisconsin, said Sunday he expects a payroll tax deal to emerge, but he questioned the commitment of Democrats to work out a compromise.

"I do believe this will get extended, but when we make offer after offer based on policies that we know Democrats and the president have supported in the past, yet they still insist on not coming to agreement, it's difficult to see exactly how this is going to pan out," Ryan said on the ABC program "This Week with George Stephanopoulos."

On Saturday, Obama used his weekly presidential address to urge Congress to "stop this middle-class tax hike from happening, period."

"No drama. No delay," the president said. "And no ideological side issues that have nothing to do with this tax cut. Now is not the time for self-inflicted wounds to our recovery. Now is the time for common-sense action. And this tax cut is common sense."

Obama encouraged listeners to contact their representatives and urge them to pass the extension.

Lew also counseled a drama-free agreement Sunday.

"We saw in December that it didn't work out so well to have a big, ugly fight over the payroll tax," he told CNN. "We can avoid that. We have enough time for Congress to get its work done."

Last week, Senate Republican leader Mitch McConnell, R-Kentucky, accused Democrats of deliberately undermining the payroll tax talks in order to allow Obama to criticize Republicans for the failure to reach a deal.

"It seems to me that Democrats in the Senate have sort of decided to link up with the Obama campaign and make sure that on any bipartisan discussions that occur, it actually doesn't lead to a bipartisan agreement," McConnell said then. "I think the reason for that becomes increasingly obvious: They want to blame Republicans in Congress if nothing is accomplished."

Senate Majority Leader Harry Reid, D-Nevada, meanwhile, suggested Republicans were trying to scuttle a deal that could help the economy in order to improve their chances of winning back the Senate majority and the White House.

"What are they going to talk about if the economy continues to improve?" Reid asked last week.

A 20-member House-Senate conference committee is working to extend the payroll tax cut for 10 months before the short-term extension runs out February 29.

The tax break is estimated to affect about 160 million Americans, saving the average family about $1,000 a year. In addition to the payroll tax measure, negotiators are also trying to extend jobless benefits for the long-term unemployed and prevent a scheduled cut to the reimbursement rate for doctors who treat Medicare patients, known as the "doc fix."

The package would cost an estimated $160 billion, and the political fight focuses on where legislators will find the money.

Democrats want to cover the cost of the package by imposing a surtax on income over $1 million and eliminating some corporate tax subsidies, like those going to oil and gas companies.

Republicans have proposed paying for a deal, in part, by extending the current pay freeze on federal workers and requiring wealthier seniors to pay higher Medicare premiums.

Meanwhile, Monday's budget proposal will unleash another round of political finger-pointing, with Obama and Democrats advocating a balanced approach to economic growth -- including spending cuts, increased tax revenue and investments in rebuilding infrastructure such as highways and bridges -- while Republicans argue for deeper spending cuts and lower tax rates.

Both sides contend that their positions will bring the economic growth needed to stimulate significant reductions in the federal deficit and rising national debt.

The Obama budget proposal will project that the deficit for fiscal year 2012 will top $1.3 trillion, before falling in 2013 to $901 billion, or 5.5% of gross domestic product.

By 2022, the deficit is forecast to fall to $704 billion, or 2.8% of GDP, according to the White House.

Senior administration officials who discussed details of the budget with reporters said it reflects policy themes Obama presented in a major speech last year in Kansas and in his recent State of of the Union address.

In the Kansas speech, Obama presented Americans with a choice: a "fair shot" with him, or a return to "you're on your own economics" of the previous Republican administration under President George W. Bush.

Obama's 2013 budget proposal had to fit discretionary spending -- below the limits set in the Budget Control Act approved by Congress last summer.

Over a decade, the cuts enshrined in the Budget Control Act total in the neighborhood of $1 trillion in discretionary spending.

Under the White House plan, discretionary spending -- which generally means day-to-day government funding not including the military or entitlement programs such as Social Security, Medicare and Medicaid -- is projected to fall from 8.7% of GDP in 2011 to 5.0% in 2022. However, details on specific program cuts were not immediately available.

A few areas of reduction are known: The Pentagon plans to spend $487 billion less over 10 years, a course that Secretary of Defense Leon Panetta has already laid out in some detail.

For example, Panetta has said the Army will save money by pulling two of its four brigades out of permanent bases in Europe to bases in the United States. Meanwhile, the Navy will be getting rid of older ships that don't have the latest ballistic missile defense.

The budget also raises taxes by $1.5 trillion, including a provision to allow the expiration of Bush-era tax hikes on families earning more than $250,000 a year, as well as incorporating the so-called Buffett Rule that requires households earning more than $1 million to pay a 30% tax rate.

Later this month, the president will unveil a plan to reform corporate taxes, including lowering rates, administration officials said.

The administration is also proposing a series of investments focused on infrastructure, education and domestic manufacturing, including $30 billion to modernize schools and an additional $30 billion to retain and hire teachers and first responders.

In addition, the budget will also offer details on what the White House calls a Financial Crisis Responsibility Fee. The tax will raise $61 billion over 10 years from large financial institutions to help offset the cost of the TARP bailout and Obama's mortgage-refinance programs.

With a presidential and congressional elections coming in November, the hostile political environment in Washington is expected to prevent the president's budget plan from advancing in Congress.

Virginia Gov. Robert McDonnell, delivering the Republican weekly address Saturday, said he expected Obama's budget proposal to "increase taxes, ignore entitlement reform, and fail to address the federal debt."

"In short, we can expect that this will not be a proactive budget built to promote fiscal responsibility and future prosperity," McDonnell said. "Rather it appears we'll see a bloated budget that doubles down on the failed policies of the past."

CNNMoney's Charles Riley and CNN's Kevin Liptak contributed to this report.

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