The Grinch That Ruined The Payroll-Tax Holiday

December 24, 2011It looks like politicians on both sides of the aisle have forgotten to add a little Christmas cheer to their end-of-year work schedule. Business owners and employees have anxiously awaited legislative confirmation that the current payroll-tax holiday would extend into next year.

Both Democrats and Republicans agree that a continuation of a reduced payroll tax is good for the economy. While the ability to generate new jobs from such a measure is questionable, lower taxes are seldom a bad thing.

Unable to reach agreement on a year-long extension, the Senate compromised to allow this extension to continue for two months into 2012. The President endorses the plan. The House of Representatives, however, was not able to agree on that legislation. Instead, House Republicans believe that the payroll-tax holiday should last the entire year.

Unless both houses of Congress agree to pass a bill to be signed into law by the President, the holiday will disappear and rates will go up on January 1.

As usual, things in Washington, DC, aren’t as simple as they seem. The legislation being considered involves many issues beyond a payroll-tax holiday: an oil pipeline, drug testing for welfare recipients and changes to unemployment benefits. These complications have turned what should have been a simple measure to benefit business owners and workers into a political mess.

Employers and employees both contribute to the payroll taxes that typically pay for Medicare and Social Security. The Medicare tax is 1.45 percent on all wages. The employer plays 6.2 percent of the salary for Social Security, up to a maximum cap, and the employee pays 6.2 percent up to the same cap.

The employee portion was reduced to 4.2 percent for 2011, boosting incomes by 2 percent of annual earnings. This means someone earning $50,000 a year would save about $1,000 or a little over $83 per month.

By failing to pass this legislation, lawmakers allow the 2 percent reduction for the employee to expire. Payroll taxes will, in effect, be increased. The House Republicans have inadvertently positioned themselves against a tax cut. They are looking for a larger and more meaningful tax cut, but after the Senate passed a two-month extension, the House put itself in a difficult position politically by not going along.

Where do we go from here? The most expedient option would be for House Republicans to vote in favor of the extension and help pass the two-month version. It seems very unlikely that the Senate will acquiesce to a year-long extension, considering how difficult it was to negotiate the two-month deal.

Either option will require that some politicians lose face. The most likely outcome is that the payroll-tax holiday extension has been lost.