Momentum Grows for Payroll Tax Cut

As Washington ponders economic solutions and political capital, payroll taxes get a second look.

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With fears of a double-dip recession growing after a series of disturbing economic reports and a second round of stimulus spending out of the question, talk in Washington has turned to a familiar subject—the tax cut—as a way to protect the poorest Americans and create jobs. The stalemate over a national debt ceiling, however, means many hurdles must be cleared before that little extra showed up in your paycheck. [Check out a roundup of political cartoons on the budget and deficit.]

In theory, a payroll tax cut could please both antitax Republicans and Democrats worried that the lower and middle classes are being squeezed by the recession. But the idea may have a rocky road in Congress, especially if lawmakers are looking to use it as part of a compromise to raise the debt ceiling. Further cutting the payroll tax—which funds Social Security—would raise questions among budget hawks worried about the cost to the deficit. But it also will find opposition among some liberals worried about the future of Social Security. Independent Vermont Sen. Bernie Sanders, who last year strongly opposed a compromise measure that included a 2 percentage point payroll tax cut, said he's still against tinkering with Social Security's revenue stream. "This is a bad idea," Sanders said in a statement released by his office. "I understand the need in the midst of a recession to put money in the pockets of working people, but this is not the way to do it. We shouldn't be diverting resources from Social Security."

So far, the proposal is only in the whispering stage. The White House has said it's looking at whether the payroll tax cut included in last year's deal with Republicans, which lowered the rate to 4.2 percent from 6.2 percent, should be extended past 2011. In an op-ed piece for the Washington Post, former White House economic adviser Larry Summers advocated temporarily lowering the rate to 3.2 percent and adding a similar cut to the portion of the payroll tax paid by businesses. Currently, businesses pay the full 6.2 percent rate. According to some reports, the tax cut is being discussed in bipartisan negotiations over the debt ceiling, which the parties are hoping will wrap up with a compromise deal soon. But the complexity of adding billions of dollars in tax cuts to legislation meant to cut the deficit could be a significant roadblock. One congressional source guessed that the proposal had about a 50 percent chance of getting through. [Read about how odds are just 1 to 3 on deal to raise debt ceiling.]

The idea is not opposed by all liberals. On ABC's This Week, former Labor Secretary Robert Reich advocated temporarily exempting the payroll tax for everyone's salary up to $20,000. Supporters say it could provide relief to those most affected by the recession while also helping to spur the economy with more spending. "The hike in gas prices has really offset the employee [tax cut] that's in place right now, so it would be good to expand that to provide a spending boost," says Chuck Marr, a former congressional economic staffer and current official at the left-leaning Center on Budget and Policy Priorities. "A payroll tax cut has something that could get support from both parties and could get business community support. From a practical perspective, I think it's one that should be strongly considered."

It would not necessarily need to hurt Social Security's viability, according to Michael Ettlinger, vice president for economic policy at the liberal Center for American Progress. The cost of the cut could be shifted around, so it is added to the $14.3 trillion national debt, not the Social Security Trust Fund. But as a political reality, temporary tax cuts have a way of becoming permanent, as neither party wants to preside over a tax increase. That reality becomes even starker during a recession.

  • Check out a roundup of political cartoons on the budget and deficit.
  • Read the U.S. News Debate: Should Congress Raise the Debt Ceiling?
  • Vote Now: Should Paul Ryan's budget plan become law?