This article was last updated on March 12
See updated details on the potential 2020 payroll tax cut
[Updated- 2012 Payroll Tax Credit Holiday, Unemployment Benefits and Medicare Doctor Payments Extended to Dec 31st] With House Republican support Congress has passed legislation extending the federal payroll tax holiday through the end of the year without demanding spending cuts to pay for it. This was a concession aimed at averting another repeat of their failed pre-Christmas showdown with the President and Democrats. The payroll tax cut drops an employees payroll withholding rate to 4.2 percent from 6.2 percent, giving the average worker an extra $85 a month.
President Obama hailed the agreement saying, “Congress did the right thing and voted to make sure that taxes would not go up on middle-class families in 2012.”
The bipartisan bill (H.R. 3630) also covered a tiered extension of unemployment benefits and Medicare reimbursements for doctors (doc-fix). Unemployment benefits were extended to between 40 and 73 weeks for new recipients (length varies by state unemployment), down from a uniform 99 weeks under older legislation.
According to the CBO, the unfunded payroll tax extension will add nearly $90 billion to the federal deficit over 10 years. Other provisions like extending unemployment benefits and medicare reimbursements will be paid for by reducing the government’s contributions to the pensions of future federal employees and auctioning off parts of the broadband wireless spectrum.
[Updated Dec 2011] There is a fierce political debate going on in Congress to extend the payroll tax credit and unemployment benefits into 2012. The payroll tax credit which cuts 2% of an employees social security taxes for a saving of up to $1000, affects about 160 million Americans and is the biggest bone of contention on Capitol Hill. The payroll tax credit will expire at the end of 2011 if Congress doesn’t agree to extend it.
The Senate has passed an interim bill extending the tax cut through February 2012. But Republicans, who control the House of Representatives, are not happy with the bill and unless they pass it, it can not be sent to the President for approval. House Republicans want more spending cuts to fund the tax credit and other measures in the bill.
In addition to the payroll tax credit, the Senate bill contains provisions to extend benefits for the long-term unemployed and doctors who care for Medicare patients. Unless the bill is passed, all of these will expire on Dec. 31st 2011 and directly affect the bottom lines of millions of Americans.
Ironically, the Senate bill that passed would raise $35.7 billion by increasing the guarantee fees that Fannie Mae and Freddie Mac charge to lenders for new home mortgages. So the same companies that Washington and the media love to beat up on, are not being used to fund the tax credit that will benefit millions of Americans.
Following on the heels of slower economic growth and persistent high unemployment the President is pushing Congress to further extend unemployment benefits insurance and the payroll tax holiday. The primary goal of these measures is to address the top concern of most Americans – job creation and economic growth. The unemployment rate is currently 9.1%, but slowing growth and seasonal factors could push it to 10% next year. The US economy needs at least six million more jobs to make up for the estimated 8.5 million jobs lost following the last recession. In a recent briefing following the debt ceiling debacle, the President said:
…steps that can be taken right away to spur economic growth such as extending the payroll tax cut and unemployment insurance. Specifically, we should extend the payroll tax cut as soon as possible, so that workers have more money in their paychecks next year and businesses have more customers next year. We should continue to make sure that if you’re one of the millions of Americans who’s out there looking for a job, you can get the unemployment insurance that your tax dollars contributed to. That will also put money in people’s pockets and more customers in stores.
In fact, if Congress fails to extend the payroll tax cut and the unemployment insurance benefits that I’ve called for, it could mean 1 million fewer jobs and half a percent less growth. This is something we can do immediately, something we can do as soon as Congress gets back. (source: The White House)
The above initiatives are not new (he also wanted to spend more on infrastructure and tax reform) and as in earlier pushes he is likely to face strong congressional Republican opposition, who view any new government spending as wasteful. Federal emergency unemployment benefits began in June 2008 and have been increased or extended eight times since then (including 4 times last year)
However following his approach in the debt ceiling raising drama he is likely to take Republicans head-on in the court of public opinion – i.e. make constituents call their members of Congress to pressure them on supporting the above and related initiatives. This will only work if public support is behind him, which is debatable at this point in time. Some left-leaning economists however are advising even bigger policy shifts to boost job growth.
“He needs more than a message,” said Robert Shapiro, a former Clinton administration economic adviser who now runs the consulting firm Sonecon. “He needs a fresh program that provides a narrative of how his continued leadership will lead to much stronger job creation, income gains, and growth than we’re seeing today. This would entail, for example, cuts in payroll taxes on both sides and a serious plan to bring down foreclosures and stabilize housing prices.”
Michael Mandel, the chief economic strategist at the Progressive Policy Institute, said that Obama must rethink his economic approach entirely – starting by jettisoning the notion that more tax cuts or spending to stimulate demand will actually boost the recovery. (Mandel contends that pumping more money into the economy largely helps Americans buy more imported goods, creating jobs overseas but not at home.)
“His message should be: We’ve come to a fork in the road,” Mandel said. “We have deep structural problems. Our production base is eroding, our innovators are being tied up with regulations, and we have an investment shortfall. I will do whatever I can to fix these problems.” Mandel added, “But the first thing he has to do is admit that the economy has problems that can’t be solved by demand stimulus, including a growing competitiveness problem that’s not going to go away.”
Right-wing conservative economists on the other hand argue that extending unemployment insurance will do little to help an economic recovery or job growth and continue ineffective government spending policies.
Rep. Michael Grimm, R-N.Y., said the high unemployment rate shows that Obama’s policies have failed. Grimm said, “…the answer is lower taxes and less regulations…For the sake of our economy, I’m urging the president to wake up to reality, abandon his failed policies, and join Republicans in the hard work needed to turn our country around and create jobs”