Senate Working to Extend Payroll Tax Cut

Today, Senate Majority Leader Harry Reid (D-NV) unveiled another proposal for how to both extend and expand the payroll tax cuts and pay for them, building on the two proposals last week from Senate Republicans and Senate Democrats who both called for paying for any payroll tax cuts, albeit with different offsets. Both of those proposals were voted down in the Senate, so Reid's latest bill is an attempt at compromise. CRFB is very encouraged that offers to extend or even expand on the current payroll tax cuts have been at least fully offset. Let's take a look at each offer.

• The First Democratic Offer: The Middle Class Tax Cut Act sponsored by Senator Bob Casey (D-PA) would have cut the payroll tax from its current 4.2 percent (normally at 6.2 percent for employers and employees alike) to 3.1 percent for employees. Compared to the current payroll tax cut, this piece would increase the average American's income by about $500. Additionally, the plan cuts employer's contribution to Social Security from 6.2 percent to nothing for the first $12.5 million in new taxable payroll in the fourth quarter of this year and the first $50 million of added payroll in 2012. Lastly, the bill cuts employer contributions to Social Security to 3.1 percent for the first $5 million of current wages paid. The Democratic offer offsets its $248 billion cost with a 3.25 percent surtax on millionaires, which is specifically designed to be deficit neutral.
• The Republican Counter-Offer: Sponsored by Senator Dean Heller (R-NV), the initial Republican proposal would have extended the current two percentage point cut for one year, while more than the $120 billion price tag. The bill's offsets would come by eliminating millionaires' eligibility for unemployment insurance and food stamps, while also raising their Medicare premiums. The bulk of the offsets come from lowering the discretionary spending caps from the BCA, which the legislation would make more manageable by reducing the size of the federal workforce and extending the current federal pay freeze by an additional three years. The proposal contains net deficit savings of $111 billion over ten years (excluding interest).
  
• Democratic Counter-Counter Offer: Today, Senate Democrats have released an altered version of the Democratic proposal, which drops the employer provisions but keeps their original employee-side tax cut at a cost of about $185 billion over ten years. The millionaires' surtax is still present, but at a lower rate of 1.9 percent instead of 3.25, given the lower costs of the overall proposal, and is set to expire after ten years. The plan would also adopt the Republican proposal to cut off unemployment benefits and food stamps for millionaires. The proposal would also increase fees that Fannie Mae and Freddie Mac charge mortgage lenders for their guarantee which would save $38 billion over ten years.

CRFB estimates that all three payroll tax cut proposals would fully pay for themselves and reduce the debt by 2022. It is important to note that the first Democratic offer and the Republican offer would continue to reduce the debt thereafter, whereas the latest proposal would repeal the millionaire surtax after 10 years.

^{Note: CRFB estimates, extrapolation of primary and interest savings after 2021. Update: Second Democratic Offer Updated with CBO Data.}

As we noted recently on our blog, any payroll tax cut provisions to help bolster the economy need to be paid for. It is encouraging that all of these proposals take this step, and we hope that the two sides find a compromise instead of dropping the offsets altogether.

But an even more fiscally responsible approach would be to have a payroll tax cut extension become part of a larger job creation and deficit reduction package that puts debt on a stable path. A package of savings in the $3-4 trillion range would go a long way towards not only putting debt on a declining path but also restoring confidence in our ability to deal with our long-term problems. A bigger package could also help resolve issues that would still remain if Reid's bill were enacted, including the expiring AMT patch, extended unemployment insurance, and many other expiring provisions. At the very least, those policies must also be dealt with in a fiscally responsible way.