RightChange: Thoughts on the Payroll Tax Holiday “Compromise”

The Senate has been punting operating via temporary budgets for almost 1,000 days.  Now they are trying to do the same thing with the payroll tax holiday.  House Republicans refused to accept the status quo from Senate Democrats prompting another Congressional showdown before Christmas.

Over the weekend, the Senate Democrats went against President Obama and passed a two-month extension of the payroll tax holiday.  House Republicans immediately rejected the idea of having to revisit the payroll issue in two months.  This morning, Democratic Majority Leader Harry Reid (D-NV) said too bad:

“Senator McConnell and I negotiated a compromise at Speaker Boehner’s request. I will not re-open negotiations until the House follows through and passes this agreement that was negotiated by Republican leaders, and supported by 90 percent of the Senate.”

The temporary 2-month payroll patch that Senate Democrats passed was not a compromise. The bill that the House Republicans passed last week was. 

President Obama asked for a one-year extension of the holiday paid for by raising taxes.  Republicans gave him exactly what he wanted and more – unemployment extension, doc fix, etc.  They offered another form of payment besides tax hikes and they requested a speedy decision on the Keystone pipeline.  Seems like a fair compromise, right?  Obama got more than what he wanted and Republicans were somewhat satisfied.

Senate Democrats idea of compromising is to punt all decisions until after the elections.  They have operated this way since 2007 when they took the majority and it shows.  We have had no consensus and no leadership on almost every major decision since the 2007 elections.  Senate Democrats can’t even get their act together enough to agree on a 4.2% tax cut.

The payroll tax rate already in place is 10.4% with employees and employers splitting the cost.  Obama and House Republicans want the rate to be cut to 6.2% -3.1% paid by the employer and 3.1% paid by the employee.   Many experts have estimated that this will put an extra $83 a month into families pockets.  The fact that Democrats cannot stay in town to work out a 4.2% tax cut is just ridiculous.

The payroll tax cut is also known as FICA-the Federal Insurance Contributions Act.  It was intended to be a premium payment that workers would contribute to their retirement, i.e. Social Security.  This payroll tax cut is “funded” by the Social Security “trust” fund, you know, that Samsonite suitcase filled with yellow IOU’s.

President Obama wanted to replace the funds by increasing taxes and Republicans wanted to replace it with the money saved by increasing fees on Fannie and Freddie and freezing federal worker pay.  The House Republican plan was a compromise until Senate Democrats changed it and adjourned for the holidays.   Since Democrats have already left town, Republicans can either let the payroll tax increase or pass the Senate’s plan.   It’s a tough spot to be in: let business’s Social Security funded payroll tax cuts expire, or pass another temporary solution. These temporary fixes are costly because of the uncertainty it creates.  

The latest reports show that these fixes may have been acceptable when it comes to the budget, but it won’t work for a temporary payroll two-month tax cut:

“Officials from the policy-neutral National Payroll Reporting Consortium, Inc. have expressed concern to members of Congress that the two-month payroll tax holiday passed by the Senate and supported by President Obama cannot be implemented properly.

Pete Isberg, president of the NPRC today wrote to the key leaders of the relevant committees of the House and Senate, telling them that “insufficient lead time” to implement the complicated change mandated by the legislation means the two-month payroll tax holiday “could create substantial problems, confusion and costs affecting a significant percentage of U.S. employers and employees.”

When Speaker Boehner says that we are just kicking the can down the road when it comes to a two-month extension, he is right.  Last week, Harry Reid said that the Senate would not leave town until this was resolved and now he has said the Senate will not return.  Senate Democrats have been pulling this since 2007 and it is time for the House Republicans and the American people to say no.

Back To Blog