Payroll Tax Holiday: Fuhgeddaboutit
It may not go away in a New York minute but the days of the payroll tax holiday are numbered. As of this posting, only 145 days to go.
Recall that in 2010 President Obama and the Congress agreed to extend Bush-era income tax rate cuts and add a special one-year employee payroll tax holiday, reducing the Social Security tax rate from 6.2% to 4.2% for 2011.
The payroll tax holiday saves the average family about $1,000 in taxes annually and benefits some 122 million people.
Which is why as 2011 wound down the White House and Capitol Hill began to worry about the election year “tax increase” that would occur if they let the payroll tax holiday expire as scheduled. The only question was how to pay for another one-year extension—which would cost the U.S. Treasury (which compensates the Social Security Trust Fund for diverted Social Security tax revenues) about $120 billion?
Who could forget the donnybrook that broke out in Washington DC just before the Christmas holidays over how to pay for extending the tax break? At the last minute lawmakers agreed to extend it for only two months, until February 29, 2012. Then they came back after the New Year and quickly agreed to extend it until the end of 2012—easily reaching consensus to not pay for it at all!
That’s right. Republicans and Democrats, including the President, unable to agree on whether to offset the $120 billion cost of the payroll tax holiday by raising other taxes or cutting government spending, simply decided to extend the 2% tax cut by adding the cost to the FY 2012 federal budget deficit, i.e., having the Treasury borrow the additional money.
Will the payroll tax holiday be extended for 2013? The answer is no, and for three main reasons.
First, the expiring tax holiday is part of the “Fiscal Cliff” Washington faces at the end of this year, when a number of tax cuts and spending programs like extended UI benefits are scheduled to expire, including all the Bush-era income tax cuts.
It’s likely that whoever is elected president in November will opt to extend the Bush-era rate cuts, at least for middle class taxpayers, making it politically unnecessary also to extend the payroll tax cut.
Second, it’s not clear that the holiday has had the intended effect of stimulating economic growth. Unemployment remains above 8% and GDP growth if anything has slowed since the tax holiday was enacted.
Third and most important, while the payroll tax holiday may have been good politics and arguably made sense as economic stimulus, it was not a good idea from the standpoint of the Social Security Trust Fund. Indeed, the two-year holiday has diverted about $240 billion that was supposed to be dedicated by law to the trust fund to pay Social Security benefits—at a time when Social Security already has a negative cash flow!
This point was underscored in a letter the CEO of AARP recently sent to Capitol Hill. A. Barry Rand writes, “Further extension of the payroll tax holiday would undermine confidence in the program and put at risk Social Security’s dedicated funding stream and the hard-earned benefits of millions of Americans and their families.”
While no one likes to see a tax cut expire, America’s payroll professionals can at least breathe a sigh of relief come this year-end. There may be some last-minute arguments over other expiring provisions of the tax code this December, but there will be no repeat of last year’s two-month extension of the payroll tax holiday. Come New Year’s Eve we can say goodbye to 2012 and to the payroll tax holiday.