Leaders of both parties are preparing outlines of legislation to extend or provide additional payroll tax relief, neither of which are expected to impact estate, gift and generation-skipping transfer (GST) taxes. Policy and Taxation Group is paying close attention to year-end, “must pass” measures to minimize the risk of harmful changes to estate taxes aimed at raising more revenues.

In the Senate, Majority Leader Harry Reid (D-NV) has proposed a measure to expand payroll tax relief, reducing the current 4.2% rate to 3.1% for employees (the rate would otherwise return to 6.2% in 2012 under current law). Offsets would include a 1.9% surtax on individuals earning more than $1 million per year, which is less than that previously proposed by Senate Democrats (3.25%) and would apply for ten years and then sunset.

In the House, Speaker John Boehner (R-OH) is expected to unveil a proposal that would extend the current payroll tax levels (4.2%), paid for largely by means testing of certain government benefits and restrictions on pay for federal workers. The measure is expected to be broader (including the Medicare “doc” fix as well). Republicans continue to vow to pursue legislation without raising taxes.

Another bipartisan effort by Senators Claire McCaskill (D-MO) and Susan Collins (R-ME) is aimed at extending the payroll tax cut with a 2% surtax on individuals earning more than $1 million annually and a repeal of as-yet unspecified tax provisions benefiting the oil industry. The bill would include an exemption for small businesses from the surtax.

While President Obama prodded Congress to move legislation forward, former Massachusetts Governor Mitt Romney, among the leading contenders for the GOP presidential nomination, indicated he now supports a one-year extension of the payroll tax holiday.

Unanswered questions remain on the extent of payroll tax relief, appropriate offsets and the inclusion of other year-end priorities in the mix.