Payroll Tax Cut Is Unlikely to Survive Into Next Year
Published: September 30, 2012 - New York Times
WASHINGTON — Regardless of who wins the presidential
election in November or what compromises Congress strikes in the lame-duck
session to keep the economy from automatic tax increases and spending cuts, 160
million American wage earners will probably see their tax bills jump after Jan.
1.
That is when the temporary payroll
tax holiday ends. Its expiration means less income in families’ pocketbooks
— the tax increase would be about $95 billion in 2013 alone — at a time when the
economy is little better than it was when the White House reached a deal on the
tax break last year.
Independent analysts say that the expiration of the
tax cut could shave as much as a percentage point off economic output in 2013,
and cost the economy as many as one million jobs. That is because the typical
American family had $1,000 in additional income from the lower tax.
But there is still little desire to make an extension
part of the negotiations that are under way to avert the huge tax increases and
across-the-board spending cuts, known as the fiscal cliff, that will start in
January without a deal. For example, without any action, the Bush-era
tax cuts will expire and the military and other domestic spending programs
will be reduced.
“This has to be a temporary tax cut,” said Timothy F.
Geithner, the Treasury secretary, testifying before the Senate Budget Committee
this year and voicing the view of many in the White House and on Capitol Hill.
“I don’t see any reason to consider supporting its extension.”
The White House has not pushed for an extension.
“We’ll evaluate the question of whether we need to extend it at the end of the
year when we’re looking at a whole range of issues,” Jay Carney, the White House
press secretary, told reporters last month.
The original point of the payroll tax holiday was to
stimulate consumer spending and aid middle-income households. But now Congress
needs the money as it struggles with vast deficits and believes the economy can
withstand the expiration.
Many Republicans vehemently opposed its passage last
year, as it would divert money from the Social
Security program. Many Democrats fervently supported it last year but show
no such enthusiasm now. Nancy Pelosi of California, the top House Democrat, has
told reporters she thinks it should expire.
Support is lacking for two main reasons. First, both
Democrats and Republicans would rather focus on the broader political and
economic issue of the fate of the Bush-era income tax cuts. These cuts, too,
were initially meant to be temporary, but are now deeply entrenched in the tax
code and central to the budget battle.
Second, though the economy has not become
significantly stronger over the past year and the tax increases in addition to
spending cuts coming next year could push the country into a recession,
independent economists say that the economy could shoulder the payroll tax
increase without undue harm.
Moody’s Analytics, for instance, estimates that
expiration of the payroll tax holiday would shave 0.6 percentage point off
economic growth, adjusted for inflation, in 2013 — and that the economy could
safely stomach government spending cuts and tax increases totaling up to 1.5
percentage points of economic output.
Still, expiration of the payroll tax cut will increase
the taxes of millions of middle-class families.
The fragile state of the recovery and the
frustratingly slow growth of the economy have heightened the stakes for the
end-of-year negotiations. Economists estimate that if Congress fails to
forestall or unwind the spending cuts and tax increases due to take effect next
year, the hit could send country back into a
recession.
The Federal Reserve currently
estimates that the economy will grow 2.5 to 3 percent next year, and that
the unemployment rate will be 7.6 to 7.9 percent, still painfully high.
The uncertainty in the United States is “currently a
threat,” said Christine Lagarde, the managing director of the International
Monetary Fund, pressing Congress last week to avoid the cliff. “It’s not a
threat just for the United States of America. It’s a threat for the global
economy.”
Some economists have pushed for an extension of the
payroll tax holiday to help support the recovery — or for its replacement with
other measures to help the millions of low-income working families whose taxes
will rise when it expires.
The Economic Policy Institute, a liberal
Washington-based research group, for instance, has said that the payroll tax cut
has a stronger stimulative effect on the economy than many other tax cuts
because the working households that receive it tend to spend the money rather
than save it. Thus, it
estimates that the tax cut’s expiration could erase 0.9 percent of economic
output and put up to a million jobs at risk.
It recommends replacing the payroll tax cut with
infrastructure spending or fiscal aid to states, as a form of support for the
recovery in the short term that would not have harmful long-term budget effects.
Some conservative economists have pressed for its
extension as well, arguing that no Americans should have their taxes go up next
year.
“Obama and Congress both need to hear this alarm
clock, wake up, and get busy avoiding a payroll tax hike insult to the middle
class’s injuries of stagnant wages and high unemployment,” wrote
J. D. Foster, a fiscal specialist at the right-of-center Heritage Foundation.
The payroll tax holiday this year has reduced workers’
tax on wages up to $110,100 to 4.2 percent from 6.2 percent. In 2012 that
translated into a $700 tax cut for a person making $35,000 a year and a $2,202
tax cut for workers making $110,100 and up.
Last winter, the White House pushed a resistant
Congress hard for an extension, arguing it was needed to support the flagging
recovery. The White House set up a campaign for Americans to send in stories about what they
would do with the extra $40 in their paychecks, and denounced Republicans as not
wanting to aid the middle class.
“For the typical American family, it is a big deal. It
means $40 extra in their paycheck. And that $40 helps to pay the rent, the
groceries, the rising cost of gas,” President
Obama said, standing with some of the families who had sent in stories.
The other provisions at stake in the fiscal cliff
negotiations overshadow the payroll tax cut.
The Congressional Budget Office has calculated that
according to current law, the federal deficit would fall by more than half a
trillion dollars from the 2012 fiscal year to the 2013 fiscal year. The
expiration of the Bush tax cuts and other provisions would reduce the deficit by
$221 billion.