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Senate defeats competing payroll tax cut bills

By Thomas Ferraro and Richard Cowan

WASHINGTON (Reuters) - The Senate on Thursday defeated competing payroll tax cut extension plans by Democrats and Republicans, clearing the way for negotiations on compromise legislation that could boost the economy next year.

In late-night votes, the Senate, as expected, defeated a Democratic plan that would have extended and expanded the payroll tax cut that is scheduled to expire on December 31.

Republicans particularly objected to a new tax on the wealthy to cover the $110 billion in projected lost revenues from continuing the temporary tax cut.

Following the votes, President Barack Obama said in a statement, "It makes absolutely no sense to raise taxes on the middle class at a time when so many are still trying to get back on their feet." He urged Congress to come to a deal to extend the payroll tax cuts.

The White House, investment banks and some economists have warned in recent days that U.S. economic growth could suffer in 2012 if the tax cut for workers is allowed to expire.

After the Democratic legislation was defeated, the Senate promptly killed an alternative Republican plan. It too would have extended the tax cut for a year. But it did not embrace the Democrats' proposal to reduce the worker tax even further and to also cut an employer-paid payroll tax.

Republican ambivalence toward any extension of the payroll tax cut was evident in the Senate as a majority of the party's 47 senators voted against the Republican plan.

The tax revenues are used to fund the Social Security retirement program. But Obama and his fellow Democrats have pushed the tax cut as a way of putting more cash into workers' hands amid a sluggish economy.

The drive to extend the temporary payroll tax cut that workers have had since the beginning of this year got a boost on Thursday when the top Republican in Congress agreed that it would help the economy. In so doing, House of Representatives Speaker John Boehner put himself at odds with some members of his party who are skeptical of its benefits.

FEELING THE HEAT?

Minutes after declaring "I'm not an economist. I don't know what kind of impact it's going to have," Boehner said renewal of the tax cut would be economically beneficial.

"I don't think there is any question that the payroll tax relief, in fact, helps the economy, in allowing more Americans ... to keep more of their money," Boehner said when pressed by reporters.

Boehner's comments, quickly welcomed by the White House, were in sharp contrast to what members of his party were saying just days ago.

Many Republican lawmakers are skeptical that extending the tax cut beyond this year will help job creation and say it will have only a temporary effect on the economy.

Until earlier this week, Republican leaders had been lukewarm to extending the payroll tax cut, but they have come under political pressure to do so in advance of the 2012 presidential and congressional elections.

"Republicans have finally felt the heat of doing something about the payroll tax cut," said House Democratic Leader Nancy Pelosi.

Boehner said his party was sticking to its demand that the tax cut be paid for and not add to the country's $15 trillion debt.

While the Senate Democratic plan defeated on Thursday would have paid for the tax cut, Republicans objected, saying that doing so with a tax on income over $1 million annually would hurt business owners who generate jobs.

The defeated Senate Republican plan covered the cost of extending the tax cut largely by continuing a pay freeze for federal workers through 2015 and gradually reducing the federal workforce by 10 percent.

Without congressional action by December 31, the payroll tax that workers pay would revert to 6.2 percent, up from the current, 4.2 percent tax. On average, it would cost American families about $1,000 a year.

A compromise bill likely would incorporate some Republican ideas for offsetting the revenue losses. For their part, Democrats might seek to include an extension of unemployment benefits that will begin to expire early next year, as well as a temporary patch for an upcoming problem with Medicare doctor payments.

Any compromise that passes the Senate also would have to be approved by the House.

(Additional reporting by Donna Smith, Rachelle Younglai and Caren Bohan; Editing by Eric Walsh)

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