By Richard Cowan
WASHINGTON (Reuters) - After initial reluctance, Republicans in Congress on Tuesday threw their support behind a one-year extension of a payroll tax cut for workers aimed at helping stimulate the U.S. economy.
The move by Republicans could help avert an end-of-year battle with Democrats following months of bitter disputes over spending cuts, tax policy and government borrowing.
"In all likelihood we will agree to continue the current payroll tax relief for another year," Senate Republican leader Mitch McConnell told reporters following a closed-door meeting of his colleagues.
McConnell added that there is now "a majority sentiment" among Republicans for continuing the temporary tax cut.
Without congressional action by December 31, the payroll tax that workers pay would revert to 6.2 percent, up from the current, temporary 4.2 percent tax.
As early as Thursday, Senate Democrats will press for a vote on their version of a payroll tax cut extension: one that would cut the tax even further, to 3.1 percent and also drop it to that level for employers. But it would make up for the lost revenue with a new 3.25 percent tax on income over $1 million dollars a year, an idea that Republicans vehemently oppose.
Top White House economist Alan Krueger said on Tuesday that extending the tax cut would strengthen the U.S. economy.
"This is a critical time for the economy and I think it's a time when the economy could use more medicine to strengthen and sustain the recovery," Krueger told a news briefing.
The current tax cut, estimated to put an additional $1,000 in workers' pockets, also is a buffer against future economic shocks including from Europe, which is suffering through a debt crisis, Krueger said.
Economists have estimated that allowing the payroll tax cut to die would shave anywhere from 0.75 percentage point to 1.5 percentage points from economic growth.
TAXING THE RICH
Senate Republicans will move to block the Democrats' proposed tax hike on the rich.
Instead, McConnell said Republicans will offer their own set of plans for covering the approximately $110 billion revenue loss from a one-year extension of the current tax cut.
As recently as two days ago, some prominent Republicans were questioning the need for continuing the payroll tax cut. The No.2 Republican in the Senate, Jon Kyl, said on Sunday the tax holiday had not stimulated job creation.
But Democrats have been hammering Republicans, accusing them of wanting to impose a tax hike on middle class families while shielding the rich from higher taxes.
McConnell did not provide details on how Republicans would offset the cost of extending the tax cut. There has been some speculation among Democratic aides in Congress that Republicans could take aim at new federal subsidies under President Barack Obama's overhaul of the healthcare system.
While that likely would prompt Democratic opposition, a new round of ideas later in December could find bipartisan backing.
Senator Rob Portman, a Republican member of a congressional "super committee" that last week failed to reach a deal on deficit reduction, said, "There are plenty of ways to reduce spending" to cover the cost of extending the payroll tax cut.
While Portman did not elaborate, there are a range of potential sources for savings, including cutting federal farm subsidies, selling some government assets, reducing federal pensions and administrative savings in the Medicare healthcare program for the elderly.
(Additional reporting by Donna Smith; editing by Anthony Boadle)