U.S. Senate Majority Leader Harry Reid will abandon a plan tolower the payroll tax for employers and focus on continuing andexpanding the current tax cut for workers, according to aDemocratic aide.

Reid will propose reducing the payroll tax paid by employees to3.1 percent for 2012 from the current 4.2 percent, said the aide,who wasn't authorized to discuss the plan publicly. Eliminating theprovision to reduce the payroll tax for employers will reduce thepackage's cost to about $180 billion over 10 years from $265billion, the aide said.

Democrats plan to offset the proposal by imposing a surtax onannual income exceeding $1 million. The aide said the surtax wouldlikely be less than 2 percent, lower than the 3.25 percent levyDemocrats had sought.

The proposal is being offered after the Senate blocked competingmeasures sponsored by Democrats and Republicans last week. Reid isrevising the Democratic measure in an attempt to build pressure onat least a few Republicans to support the bill. Democrats control53 seats in the Senate and will likely need to secure 60 votes towin passage of the legislation.

“Raising taxes by $1,000 next month will have an immediatenegative impact on the economy,” Reid said on the Senate floortoday. “We all know Congress can't afford to play chicken with thiseconomy.”

Reid's proposal will end the millionaire surtax after 10 yearsinstead of making it permanent, as Democrats previously sought. Hewill propose means testing for food stamps, a provision Republicansincluded in their plan. Reid's plan won't require high earners topay higher Medicare premiums, as Republicans had proposed.

President Barack Obama said Republicans would be “leaving 1.3million Americans out in the cold” next month if they allow thepayroll tax cut to lapse.

“It's important insurance for them against the unexpected,”Obama told reporters today. “It will spur spending. It will spurhiring and it's the right thing to do.”

Unless Congress acts, the current payroll tax cut — whichlowered the employee portion of the Social Security payroll taxfrom 6.2 percent to 4.2 percent for 2011 — will expire on Dec. 31.Mark Zandi, chief economist at Moody's Analytics, has said failureto extend the payroll tax cut into 2012 could cause the U.S. grossdomestic product to decline by at least one-half of one percentagepoint during 2012.

Millionaire Surtax

With the millionaire surtax, Reid's measure will encounterresistance from Republicans who have said such a provision willhurt small business owners who record business income on theirindividual tax returns. Don Stewart, a spokesman for SenateMinority Leader Mitch McConnell, said Republicans haven't seen thedetails of the proposal.

“But I do know that the only thing bipartisan about adding a taxhike on job creators is the opposition,” he said in an e- mailedstatement.

Senator Orrin Hatch of Utah, the top Republican on the SenateFinance Committee, criticized the surtax proposal in an e-mail,calling it a “permanent tax hike on small businesses to pay fortemporary one-year tax policy.”

Republicans in the U.S. House of Representatives plan to proposelegislation in coming days that would extend the existing 4.2percent payroll tax rate for one year for employees. Houselawmakers also will seek to avoid cuts to physician reimbursementsby Medicare and address unemployment benefits that are slated toexpire at the end of the year.

Reid will include some mandatory spending reductions that thecongressional debt-cutting supercommittee considered before itreached an impasse last month, said the aide, without saying whichprovisions were being considered.

Bloomberg News

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