Congress passed legislation Friday extending the payroll tax cut, unemployment benefits, and the “doc fix” for Medicare physician reimbursements through the remainder of the year.

The House approved the measure by a vote of 239-132, while the Senate quickly passed the legislation by a 60-36 vote, ahead of a congressional recess that starts this weekend. President Obama is expected to sign it into law before the current two-month extension expires at the end of this month.

The bill, known as the Middle Class Tax Relief & Job Creation Act, extends the 2 percentage point cut in Social Security and Medicare withholding taxes to 4.2 percent. It also extends unemployment benefits through the rest of the year, although the 99-week maximum benefit in some states will be gradually scaled back to 73 weeks (see Congress Releases Details on Payroll Tax Cut and Unemployment Extension).

Democratic and Republican negotiators in a congressional conference committee agreed this week to pay for the extension in part through auctions of wireless spectrum, a 2.3 percent increase in pension contributions by new government employees, and health care offsets that fix technical errors and reduce spending on providers and corporations to ensure Medicare patients continue to have access to their doctors.

The agreement includes some reforms to the unemployment insurance program pushed for by Republicans, allowing states to promote the re-employment of unemployed workers through demonstration projects, and to require drug tests, but only for people who were fired for unlawful use of controlled substances. It also creates a national job search standard, covering benefits from beginning to end, and requires the unemployed to look for a job if they receive unemployment benefits, while expanding work-sharing programs to help avoid layoffs in the first place.

“Perhaps one aspect of this agreement that is most noteworthy is what is not included—there are no tax increases and no budget gimmicks,” said House Ways and Means Chairman Dave Camp, R-Mich. “Despite countless attempts to pay for these reforms with job-killing tax increases, this agreement does not raise taxes on families or employers. It also doesn’t rely on budget gimmickry that would saddle future generations with even greater debt.”

However, the compromise bill drops some of the Republican-backed proposals for mandatory drug testing of unemployment insurance recipients and requirements that the unemployed be enrolled in a Graduate Equivalency Degree program. “To say to people, you don't get a check if you're not in a GED program when there are 160,000 people in this country who are on waiting lists, that's out of here because it deserved to be out of here,” said House Ways and Means ranking member Sander Levin, D-Mich. “And in terms of the Republican effort to test people for drugs, the agreement is very limited. So it is really masking the reality to call this major reform.”

The legislation extends the 4.2 percent withholding rate on Social Security and Medicare taxes through the end of the year. Last December, Republicans and Democrats could only agree on how to pay for a two-month extension through the end of February before leaving for a holiday recess. The new agreement extends the tax cut through the rest of the year, although Republicans agreed to drop a demand for the tax cut to be fully offset by spending cuts. Democrats in turn dropped a demand for the tax cut to be offset by a tax increase on taxpayers with adjusted gross income over $1 million.

Under current law, the employee-side Social Security tax equals 6.2 percent of the first $110,100 of wages, and the self-employment side equals 12.4 percent of such self-employment income. In December 2010, however, Congress reduced these tax rates by two percentage points during 2011. This meant that employees paid only 4.2 percent on wages and self-employed individuals paid only 10.4 percent on self-employment income. 

The recently enacted Temporary Payroll Tax Cut Continuation Act of 2011 extended this holiday through February 2012. It capped the amount of compensation eligible for the holiday at $18,350 so that high-income workers were not able to claim the tax cut on all of their taxable wages, while other workers were not. This cap is not necessary if the payroll tax holiday is extended through the entire year. The conference committee agreement in the new legislation extends the payroll tax holiday through the end of 2012 and repeals the $18,350 cap.