Payroll tax cut likely hub of Obama's jobs plan

The White House is hoping that an extension of this year's payroll tax cut is popular enough with voters to help win broader support for President Barack Obama’s $300 billion jobs program.

Congressional Republicans are already throwing cold water on the idea of wrapping a broader program around it.

“If (the payroll tax cut) is standing alone, I think that might have some success,” said Sen. Orrin Hatch, R-Utah. “If it's lumped in with a whole bunch of big spending programs that builds Washington at the expense of the rest of the economy he’s not going to have much support from me or any other Republican.”

And while the tax cut may help rally support from voters struggling to make ends meet in a lousy job market, it probably would have only limited impact on the faltering U.S. economy.

"(The proposals are) similar to previous stimulus packages for the job market,” said Fred Dickson, chief market strategist at D.A. Davidson & Co. ”I'm looking for surprises, but at this point, I don't see much of it."

The centerpiece of Obama's plan involves extending, for another year, a lower tax rate that has helped bolster household budgets battered by stagnant wages and a stubbornly high unemployment rate.

The payroll tax, which raises money for Social Security, was cut to 4.2 percent from 6.2 percent on earnings up to $106,800. The difference amounts to about $1,000 for the average American household and would cost the government about $115 billion in lost revenues.

Obama is also expected to propose a cut in the employers' share of the payroll tax for each new worker they hire, at a cost of about $33 billion. The plan is also expected to extend tax breaks for businesses that buy new equipment. Under a deal worked out in December, companies can deduct the full value of new equipment — up from the previous deduction of only half the value. That tax break is set to expire at the end of the year.

The president may also propose another extension of federally financed jobless insurance benefits for unemployed workers who have exhausted their initial state-funded claims. That would help support millions of families collecting extended benefits under emergency unemployment insurance set up during the recession.

The program, which has been renewed several times, it set to expire at the end of this year. Keeping it going through 2012 would cost about $50 billion to $55 billion. The White House has also supported the idea of using unemployment benefits to cover job training costs for new hires, similarly to a program in place in Georgia.

Little new stimulus
At nearly $200 billion, extending payroll tax cuts and long-term unemployment insurance would consume the bulk of the president’s proposals. But because these tax breaks and jobless benefits are already in place, they wouldn’t provide any new stimulus.

That leaves roughly $100 billion for the rest of the president’s plan. Those proposals are expected to include aid to state and local governments to help them slow the pace of worker layoffs. As money from the 2009 stimulus package runs out, Obama is expected to propose a new round to help pay for police, fire and school salaries.

The White House has also hinted that Obama will propose emergency federal spending to support construction of schools, highways and other infrastructure. But with Congress looking to cut spending, those proposals will likely be relatively modest. That will also minimize the number of new jobs the proposals would create.

"Anything that would be of a big enough size to really help the labor market is going to have trouble getting through Congress," says Michael Hanson, senior economist at Bank of America Merrill Lynch. "And anything that can get through Congress will be too small to be much help."

That’s why many observers see Obama’s job package as primarily an exercise in politics, not economics.

“A number of the ideas on the president’s 'wish list' will not become law, but rather will serve to as 2012 campaign fodder as both parties lay out competing jobs agendas,” Nomura Securities chief economist Dave Resler said in a note to clients.