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Senate Democrats ready backup plan on payroll tax bill

By Donna Smith and Richard Cowan

WASHINGTON (Reuters) - Senate Democrats have begun preparing a backup plan to extend a tax cut for workers if a special congressional negotiating committee fails to reach quick agreement, Senate Majority Leader Harry Reid said on Friday.

Reid's comments, in a conference call with reporters, were seen by some congressional aides as a signal to Republicans that he is prepared to play hard ball on an issue that favors Democrats in an election year.

House of Representatives Speaker John Boehner, the top Republican in Congress, has struggled to convince rank-and-file members to lay aside their doubts about the stimulative effect of the tax cut. Party leaders fear being punished in the polls if it is allowed to expire at the end of the month.

Word of Reid's backup plan on the payroll tax cut ignited a sharp response from Boehner, who complained that Democrats had yet to offer any serious proposals in negotiations.

Congress has until February 29 to extend the payroll tax cut for 160 million workers. Otherwise the 4.2 percent tax on wages they pay into the Social Security retirement system will rise to 6.2 percent on March 1.

A number of economists believe the payroll tax cut will help give sluggish U.S. economic growth an extra boost this year.

"I just want to make sure they (Republicans) understand there is a backup plan," Reid said.

He declined to provide details, but a Senate Democratic aide said the aim would be to extend the payroll tax break and jobless benefits for the long-term unemployed through 2012. The legislation is also expected to avert a 27 percent pay cut for doctors treating elderly Medicare patients.

BOEHNER HITS BACK

Boehner quickly issued a statement urging Reid to use his energies to help congressional negotiators come to agreement on a bipartisan plan and said Democrats had so far failed to produce a comprehensive plan to extend the popular payroll tax break through the end of the year.

He noted that the House passed a full-year extension of the tax cut in December, but that bill failed to gain Democratic support because it contained controversial policy measures.

"You can't have a 'backup plan' if you haven't offered anything to back up," Boehner said.

The panel of House and Senate negotiators has made slow progress in its first three public meetings with little sign of agreement on the most contentious issue of how to pay for the roughly $170 billion package. The panel has scheduled a fourth public meeting for Tuesday.

While details of Reid's backup plan were not available, in the past he has pushed for a new tax on millionaires to pay for the tax cut for workers. The millionaires tax, which appears to have support among voters, faces opposition from Republicans, who do not want any tax rate increases, but also among some Democrats.

Democrats have successfully used this issue to paint Republicans as favoring the wealthy over the middle class, a theme they are expected to continue through the November presidential and congressional elections.

The two sides tangled over the payroll tax cut late in December and could agree only on a two-month extension with a promise of coming up with a bipartisan agreement to keep the break in place through the rest of the year.

A fresh partisan battle could provide a way for Reid and his fellow Democrats to remind voters that Republicans had been cool during most of last year to the payroll tax cut.

More recently, Republicans have embraced the idea, but have also tried to attach controversial initiatives, such as TransCanada's Canada-to-Texas oil pipeline that they say will create jobs.

(Editing by Eric Beech)

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