President Obama’s call for an extension of a payroll tax cut could upend the political dynamics in Congress heading into the fall, as Democrats adopt a trademark Republican tactic: warning against a looming tax hike.
With the economic recovery stalled, the Obama administration is pushing aggressively to keep in place the payroll tax holiday that was enacted as part of the bipartisan tax deal Congress passed in December.
Republican leaders have resisted that idea, preferring instead to push for a comprehensive tax overhaul that would simplify the code and permanently lower income and corporate rates.
It would be difficult for such a broad package to be completed this year, however, raising the possibility that Americans could face a higher tax bill next year despite the weak economy.
“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,” Obama said at the White House on Monday.
The president wants the tax cut extended along with unemployment insurance benefits, and has warned that if Congress fails to do so, “it could mean 1 million fewer jobs and half a percent less growth.”
The administration says the two-percentage point reduction in the payroll tax put in place for 2011 has cut tax bills by about $1,000.
While Republican leaders have not rejected the proposal outright, they have sought to shift attention to their broader tax platform. Kevin Smith, a spokesman for Speaker John Boehner (R-Ohio), would not comment on the payroll tax extension, saying Republicans were focused on their own job-creation proposal, which includes tax reform, trade deals and reducing regulations.
The GOP chairman of the Ways and Means Committee, Rep. Dave Camp (Mich.), has also criticized extending the tax cut.
“I'm not in favor of that. I don't think that's a good idea,” he said during an event sponsored by the Wall Street Journal in June, before the White House ramped up its push. “We need a more overarching approach to our tax policy,” Camp said, calling the payroll tax holiday “piecemeal.”
The Republican budget chief, Rep. Paul Ryan (Wis.), has dismissed the payroll tax cut as “sugar-high economics.”
“I’m not a Keynesian, so I don’t think sugar-high economics works,” the Wisconsin Republican said at a policy discussion hosted by The Hill in June. “We’ve sort of proven this already, a number of times. Temporary tax rebates don’t work to create economic growth. Permanent tax changes do.”
The likely fate of the payroll tax is unclear, and whether the break is extended depends to a large extent on the scope of the congressional “supercommittee” charged with finding at least $1.5 trillion in deficit reduction by Thanksgiving. If the panel tackles tax reform, the payroll tax could be addressed as part of that effort, or separately.
The administration’s push is part of its long-running effort to balance short-term economic growth with a broader bid to slash the deficit. Ryan’s Budget Committee said the combination of extending the payroll tax holiday and unemployment insurance, along with new spending for infrastructure Obama has proposed, could add $250 billion to the deficit over 10 years.
Yet the payroll tax issue cuts against the traditional partisan divide on taxes. Republicans have hammered Obama and congressional Democrats for opposing a permanent extension of the entire slate of George W. Bush-era tax cuts, arguing that they want to raise taxes on wealthy Americans and small businesses alike.
A Democratic strategist said the GOP position on the payroll tax is “yet another example of Republicans being more concerned with protecting the interests of the wealthy than protecting working families. The GOP would rather seniors and the middle class sacrifice while the wealthy pay even less in taxes.”
One complicating factor for Obama is that many liberals in Congress are not enamored of the administration’s idea, either. They are concerned that reductions in the payroll tax could threaten Social Security by draining its trust fund.
In July, 62 House Democrats signed a letter urging President Obama not to extend the payroll tax holiday.
“We remain gravely concerned that yet another, unacceptable cut to Social Security’s revenue stream appears to be on the table,” wrote the Democrats, who were led by Reps. Lloyd Doggett (Tex.), Ted Deutch (Fla.) and Mark Critz (Pa.). “As alternative measures would have the same net effect on deficits and the economy, there is simply no need to negotiate cuts to Social Security taxes.”
Clint Stretch of Deloitte Tax said the debate over the payroll tax holiday illustrated a greater divide between the Democrats who believe in temporary, stimulative measures and Republicans who do not.
“All this is really just about theological issues,” Stretch, a managing principal at Deloitte, told The Hill. “If you believe government can help solve problems, you’re for this. If what you already believe is that government is the problem, you’re not.”
As Stretch also noted, Republicans view policies like the Bush tax cuts as greater drivers of economic growth — and that the GOP intended for those rates, which were originally on the books for 10 years and were extended late last year, to be permanent.
Stretch said that there were political risks for Republicans to come out in favor of extending the holiday as a stimulus measure, even if Democrats could try to frame that stance as backing a tax hike.
“If you have this position that government’s the problem, and then you start trying to do stimulus through the tax code, you’re exposing your right flank,” Stretch said.
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