The Coming Middle Class Tax Hike

Neither Republicans nor Democrats eager to argue for extending payroll tax rate

Alan Krueger / AP
• November 28, 2012 5:00 am


Employee payroll taxes are scheduled to rise nearly 50 percent in 2013 absent action by lawmakers, and there is a growing sense that both parties might be willing to let that happen.

Party leaders have about five weeks to resolve a host of budget issues to avoid going over the "fiscal cliff," the term used to describe more than $600 billion in automatic spending cuts and tax increases scheduled to occur on Jan. 1, 2013.

Much attention has been paid to the potential expiration of Bush-era tax income rates, but the looming expiration of the temporary payroll tax cut has been largely absent from those discussions.

The White House released a report Monday detailing the negative economic impact of allowing the Bush-era tax rates to expire for middle-income Americans. It contained no mention of the payroll tax cut, which by the White House’s own estimates affects roughly 160 million Americans and saves the typical middle class family $1,000 per year.

Chairman of the president's Council of Economic Advisers Alan Krueger awkwardly dodged a question about extending the payroll tax cut during a White House press conference on Monday.

"There are many tax provisions that are expiring at the end of the year and the president has said that the payroll tax cut, among others, should be on the table," he told reporters, noting that the cut was intended to be "explicitly temporary."

Treasury Secretary Timothy Geithner was more forthright during his testimony before the Senate Budget Committee earlier this year.

"This has to be a temporary tax cut," he said. "I don’t see any reason to consider supporting its extension."

The cut was originally passed in December 2010 as part of a larger deal to temporarily extend all of the Bush-era tax rates. Lawmakers in February agreed to extend it for another year following a contentious showdown between President Barack Obama and House Republicans.

Both sides agreed at the time on the need to extend the provision, which lowered the employee payroll tax rate from 6.2 percent to 4.2 percent, at a cost of around $200 billion.

However, there appears to be far less enthusiasm among lawmakers this time around for a further extension of the lower rate.

House Republicans privately concede that their membership is opposed to an extension and note that the relative silence from the White House and other Democrats could signal a bipartisan consensus.

Sen. John Thune (R., S.D.), a member of the Senate Republican leadership, said extending the payroll tax cut "could be a dead issue."

Several leading Democrats, such as House Minority Leader Nancy Pelosi (D., Calif.), have suggested letting the cut expire at the end of the year.

"I would hope that we would not extend it," Pelosi said in September.

Self-described socialist Sen. Bernie Sanders (I., Vt.) has said he "strongly opposed" extending the cut because the payroll tax brings in much needed revenue to the Social Security trust fund, which is already projected to run dry in a little over two decades.

Several Republicans have raised similar concerns.

AARP, the powerful senior citizen lobby group, has said it supports letting the payroll tax cut expire for this very reason.

Even those advocating for its extension, such as Rep. Chris Van Hollen (D., Md.), ranking member of the House Budget Committee, have said it should be done only on a temporary basis to stimulate the economy.

Douglas Holtz-Eakin, a former director of the Congressional Budget Office, said the payroll tax cut was "likely to go away" because most lawmakers now regard it as an ineffective policy.

"It was originally intended to spur employment growth," he said. "I don’t think anyone believes it has been especially successful."

However, there is some disagreement among conservatives regarding the fate of the payroll tax cut.

J.D. Foster, a tax specialist at the Heritage Foundation, has argued that the cut is bad policy but should be extended regardless.

"Was the payroll tax cut particularly good policy when Obama first proposed it? No. Did it help the economy? Not particularly. Then why extend it? Because that family needs that $1,000 in payroll tax relief," he wrote.

Conservative columnist Ross Douthat argued last week that the payroll tax "deserves to be pared away into extinction," or at the very least extended permanently at the current rate.

Others disagree.

Sen. Ron Johnson (R., Wis.) said the payroll tax cut was "terrible policy from the beginning."

"First of all, I think the payroll tax is mislabeled," he said. "It’s really a contribution to America’s retirement plan [Social Security]. I don’t believe we ever should have reduced it."

"It flunks the benefit-cost test," Holtz-Eakin said. "We’re just not getting anything out of it."

There is some concern among Republicans that Democrats might disregard policy considerations in order use the payroll tax cut as a political wedge issue. Democrats did this in February when House Republicans arguably lost a showdown with the White House.

It remains to be seen whether or not lawmakers can strike a deal to avoid going over the fiscal cliff.

Either way, though, the payroll tax cut appears unlikely to survive.