Competing Payroll Tax Plans Eyed By Congress

12/8/2011

By Mark Corey, CPA, JD

Recently, the United States Senate defeated competing Democratic and Republican plans to extend the 2% payroll tax cut put into law in the same bill that extended the Bush-era tax cuts (Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, or H.R. 4853 ).

Action by Congress is required to extend the reduced portion of payroll taxes the employee pays for Social Security withholding. Under current law the employee pays 4.2% to the Social Security Trust Fund (down from the normal rate of 6.2%). The savings to the average American family with this tax cut has been about $1,000 per year.

As with most recent political disagreements, the lack of consensus comes from how to pay for the tax cuts. Democrats want to raise taxes on people making more than one million dollars annually by 3.25%. Republicans want to cut existing government spending including extending the pay freeze for federal employees from two to three years and reducing the federal work force by 10% over several years. Republicans also want to reduce federal unemployment and welfare benefits for wealthy earners. The Democratic plan would have cost nearly $200 billion as there were provisions to extend unemployment benefits and fix a problem with Medicare payments to doctors. The competing Republican plan was estimated to cost around $110 billion.

Both sides have publically stated that they want to extend the payroll tax reduction, but they cannot agree on how to pay for it. The reduced payroll tax is popular with Americans as it represents additional money in the paycheck, but it remains to be seen if Congress can come together before the Congressional holiday recess and pass a bill extending the reduced tax.