FDR to Congress: don’t mess with the payroll tax

Original Reporting | By Mike Alberti |

Looking ahead to the maneuvering of 2012

To understand the risk, Richtman said, it’s important to look ahead to next year, when the extended payroll tax cut would likely be set to expire again. He and several other experts said that, once a tax cut is put in place, it becomes very difficult to restore rates to their earlier level. Those seeking to do so are persistently attacked as supporting tax increases.

Joseph J. Thorndike, the director of the Tax History project at Tax Analyst, which publishes tax information, added that temporary tax cuts or tax holidays are seldom temporary in today’s Washington. “We have, of course, an unpleasant tax record of applying temporary taxes that then just stick around,” he said, referring in particular to the Bush tax cuts of 2001 and 2003, which remain in place today. “These temporary tax cuts are like vampires — they never die.”

Max Richtman, president of the National Committee to Preserve Social Security and Medicare, worries that, a year from now, when the tax cut is set to expire, Republicans could deploy the “tax increase” argument that Democrats are currently using to make permanent what is supposed to be a temporary tax cut.

Even when the payroll tax cut was first enacted in 2010, some members of Congress were worried about the prospect that it could become semi-permanent. “Once something like this goes into place, a year from now, when it expires, it’ll be portrayed as a tax increase,” Sen. Bob Corker (R-Tenn.) said in Dec. 2010.

And now, President Obama, lawmakers from both parties, and many members of the press are, indeed, calling the return to normal rates a “tax increase.”

Richtman worries that, a year from now, when the tax cut is set to expire, Republicans could deploy the “tax increase” argument that Democrats are currently using to make permanent what is suposed to be a  temporary tax cut.

“If that happens,” Richtman said, “the next logical step is for Republicans to demand that we reduce benefits to put them in line with [reduced] revenues.”

Altman agreed, and added that Republicans could argue that Social Security is increasing the deficit, because some of its funding had begun to come from the general fund dollars that were replacing lost payroll tax revenues. (While neither of the current proposals would add to the deficit because each provides an offset either in the form of additional taxes or reductions in the federal workforce, future payroll tax rate reductions will not necessarily come with such financing.)

Added impetus for tampering with Social Security will come from what many advocates and economists see as the likelihood of another extension of the payroll tax cut in 2012 in the face of a still-hurting economy.

Andrew Fieldhouse, federal budget policy analyst at the Economic Policy Institute, said that spending measures are more effective than tax changes. Indeed, he said, almost any measure that spent money would provide more of a boost than measures that work through the tax code.

It had always been the case that “Social Security does not add a penny to the deficit because it’s completely self-financing,” Altman said. “All of a sudden, it’s not anymore.” She anticipated Republicans taking up the argument that Social Security was “putting pressure on the entire federal budget.”

“It’s important to remember that this is what Republicans have wanted for a long time,” Altman said. “They want smaller government at all costs, and the way they do it is by continuously lowering taxes. This fits right into the ‘starve the beast’ strategy.”

Howard Gleckman, a resident fellow at the Urban Institute and the author of Caring for Our Parents: Inspiring Stories of Families Seeking New Solutions to America’s Most Urgent Health Care Crisis, said that public perception could be a compounding factor, especially since the Democrats’ proposal would cost $265 billion, approximately 10 percent of the current trust fund surplus.

“There is already widespread concern that the trust fund is broke, which certainly overstates the case. But when you take $265 billion out [of funds normally dedicated to Security Security], you’re not doing much to improve its credibility.”


How much would the proposals cost?

The payroll tax was first reduced in December of last year as part of a larger package that included an extension of unemployment benefits and of the Bush tax cuts that had been scheduled to expire. The payroll tax on employees was reduced to 4.2 percent from 6.2 percent at a cost of nearly $112 billion. The revenues lost to the Social Security trust fund were replaced with money from the general fund. No offset was put in place, meaning that the tax cut essentially constituted deficit spending.

President Obama included an extension and expansion of the payroll tax cut as a part of the American Jobs Act, a proposal replicated in a Senate bill introduced by Senate Majority Leader Harry Reid on Nov. 28. The proposed bill, which garnered 51 votes in the Senate on Thursday but fell short of the 60 votes needed to overcome a filibuster, would have cut payroll taxes on employees by a further 1.1 percent, to 3.1 percent, and cut payroll taxes on employers to 2.1 percent on the first $5 million that a company pays in wages.

The price tag of the initial Democratic proposal would have been $265 billion in 2012. That would have amounted to about 10 percent of the Social Security trust fund’s current $2.6 trillion surplus. The revenues that would have been lost to the trust fund would have been replaced from the general fund, but this time Democrats proposed to pay for that lost revenue with a 3.25 percent surtax on incomes over $1 million.

Most Republicans have balked at the millionaires’ tax, and they introduced their own bill last week that would have extended last year’s tax cuts without expanding them, at a cost of about $120 billion. They would have offset that revenue loss by freezing the pay of federal employees through 2015 and reducing the federal workforce by 10 percent. The Congressional Budget Office estimated that the Republican proposal would have decreased the deficit by $111 billion.

After both bills failed to garner the necessary 60 votes in the Senate on Thursday, Democrats introduced a new bill on Monday that would not extend the tax cut to employers, and would lower the proposed surtax on incomes of over $1 million to 1.9 percent. In the new bill, the surtax would also expire after 10 years. The estimated cost of the new bill is $185 billion. Republicans have continued to express distaste for the millionaires’ tax and are expected to introduce their own, modified bill today, which may include a provision to extend unemployment benefits.

Though all of the proposals so far under consideration would replace the revenue lost from the Social Security trust fund with general fund revenues, economists estimate that if the 2010 payroll tax rates were made permanent and the revenue were not replaced, Social Security’s long-term shortfall would be doubled.

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