The payroll tax hike in the House-passed extenders bill moves to the front burner in the Senate this week.

Senators Olympia Snowe (R-ME) and Mike Enzi (R-WY) introduced an amendment late last week to strike the provision from the bill. As a potential swing vote on the overall package, Snowe’s opposition in particular is sure to catch Leadership’s eye.

“At a time when Congress continues to dither on enacting a small business jobs bill, Section 413 is a poison pill in this tax bill, robbing American small businesses of the capital they need to create new, good-paying jobs,” Senator Snowe said in a release accompanying the amendment.  “Indeed, this is a job-killing tax hike that will force entrepreneurs across the nation to retrench and reconsider any plans for hiring employees or expanding their business.”

Meanwhile, Senator Enzi raised this issue at a Finance Committee hearing last Thursday, first questioning Treasury Secretary Timothy Geithner about it and then entering into a colloquy with Chairman Max Baucus (D-MT). In response to Enzi’s concerns, Senator Baucus made clear his staff was working on an alternative.

The business community has come together as well, with twenty-seven business groups signing a letter spearheaded by the S Corporation Association highlighting the many flaws with the House-passed provision. In addition to focusing on the policy challenges, the letter notes the complete lack of legislative history accompanying this major new tax:

Finally, this new tax is an excellent example of what happens when the legislative process is short circuited. It was never the subject of hearings or public review, it was made public just a few short weeks ago, and it has been attached to legislation that already passed both the House and the Senate. It is an accident of the legislative calendar that we are in a position to offer our views at all.

If it were not for the deliberative nature of the Senate, this provision would have been enacted and signed into law before anybody in the business community – including legal and accounting professionals who advise them – knew it was even under consideration.

The Senate’s rules and the Memorial Day recess delay gave us time to get the message out, however, and we’re beginning to hear from practitioners and affected businesses from around the country. As a Dow Jones Newswire story makes clear, S corporations targeted by this provision extend well beyond the lawyers and lobbyists” highlighted by the Ways and Means Committee:

Gabriel Durand-Hollis, owner of a San Antonio, Texas-based architecture and interior design firm, is no John Edwards. But he could nonetheless see his taxes rise as a result of a Senate measure that seeks to crack down on a technique Edwards, a former U.S. Senator from North Carolina, once used to avoid paying hundreds of thousands in payroll taxes. Durand-Hollis, one of two owners of a firm that employees 25, said the provision, if enacted, would boost his federal tax bill by $30,000 or more. “If we had to send a big check like that to the IRS at the end of the year, we’d have to take a hard look at whether we can afford Christmas bonuses, or that new software purchase,” Durand-Hollis said in an interview.

On the process front, we expect Majority Leader Harry Reid (D-NV) to file cloture on the underlying bill (Baucus substitute, really, but we digress) sometime tomorrow or Wednesday. That would set up a key vote on closing debate as early as Thursday. Word is that Senator Reid is short of the 60 votes he needs right now and that changes to the underlying bill will be necessary for him to attract those key swing votes.

With the introduction of the Snowe-Enzi amendment, the odds of positive changes to the small business payroll tax hike shot up dramatically. That’s good for the small business community and good for good tax policy. The House-passed provision is clearly a step backward for taxpayers and the Tax Code. It would impose new costs on small businesses while asking the impossible of the IRS. With the leadership of Senators Snowe, Enzi, and others, we’re hopeful we can fix all that.