A giant middle-class tax hike looms at the end of the year, and both parties and the White House — for now — seem content to ignore it.
As the two parties close in on the climax of a decade-long clash over Bush-era tax cuts, neither party has proposed preventing a looming $120 billion yearly payroll tax hike.
Last year, President Barack Obama had Republicans over a barrel, accusing them of wanting to raise taxes on the middle class unless they extended his payroll tax cut — worth 2 percent of a worker’s salary.
The GOP caved on this year’s extension, but there has been nary a peep since from the White House, presumptive Republican nominee Mitt Romney or Congressional leaders in either party about extending it again. And Senators today expressed doubt that it would be extended.
The payroll tax cut actually costs the Treasury more than the Bush tax cuts for those making more than $250,000 a year, which have become the subject of the titanic struggle on Capitol Hill. On its own, its expiration will result in one of the largest tax increases in history.
But the payroll tax cut was sold as a temporary measure. It has no lobbying arm and no super PAC. The maximum tax cut per person — just more than $2,000 per worker — isn’t the stuff that gets people to make campaign contributions or hire an army on K Street to woo lawmakers to keep it. And the Bush-era tax cuts are taking up all of the oxygen.
White House Press Secretary Jay Carney said it was premature to discuss the issue when asked about it recently. And lawmakers in both parties on Capitol Hill have been nervous about the payroll tax cut because it could over time erode the funding for Social Security. Although so far the tax cut has been structured to come out of the general fund, in an era of trillion-dollar deficits, there’s no guarantee that Social Security will get all of the trillions in IOUs that the general fund already owes it.
That’s an argument the GOP made last year against extending the payroll tax cut the first time before it relented just before Christmas. But the political case Obama and the Democrats prosecuted against Republicans then was more potent. How could they fight tooth and nail against a dollar of tax hikes for millionaires while forcing a tax hike on 160 million families?
But this year, Democrats and the White House are pitting tax cuts for the wealthy against spending programs they say would have to be cut deeply instead — from roads to education to health care and research.
Even though Senators in both parties don’t see much chance for another extension, their leaders pontificated today on the need to prevent a tax hike.
Senate Minority Leader Mitch McConnell (R-Ky.) said today that lawmakers should say, “We’re not going to let anybody’s taxes go up at the end of the year,” but the GOP tax plan authored by Senate Finance ranking member Orrin Hatch (R-Utah) doesn’t extend the payroll tax cut.
“It doesn’t work,” Hatch said of the payroll tax cut in an interview. “It also puts a dent in Social Security, which is already suffering. I have a tough time with it.”
Senate Majority Leader Harry Reid’s (D-Nev.) rhetoric also doesn’t match the Democratic plan. “Middle-class families should ... not be left wondering whether they’re going to see their taxes go up next year,” Reid said. But when asked why Democrats weren’t proposing to extend the payroll tax cut, Reid said that conflating them was confusing the issue.
Senate Finance Chairman Max Baucus (D-Mont.) said later that the payroll tax cut is not high on the priority list.
“I think there would be a lot of Republican resistance to it, and there are so many other provisions of higher importance that it’s difficult to extend,” he said.
Baucus also said Democrats are concerned about the sanctity of the Social Security trust fund.
The White House isn’t pushing it either.
“The payroll tax cut was intended to be a temporary measure to give middle-class families relief during these difficult economic times,” a White House official said. “Though we haven’t proposed extending the payroll tax cut beyond the end of the year, we have looked at many ways to ensure tax relief for the middle class, including pushing Congress to extend the Bush-era rates for 98 percent of families and extending the Earned Income Tax Credit, the Child Care Tax Credit and other tax relief measures through next year.”
There also isn’t much of an ideological underpinning for the payroll tax cut; while several Republicans initially proposed a temporary payroll tax cut in 2009 as an alternative to the stimulus package, think tanks on the right have spent decades touting the benefits of reduced income tax rates, particularly on investment and capital. And groups on the left are often more worried about spending cuts than taxes.
Sen. Pat Toomey (R-Pa.) said the payroll tax cut should be considered in the mix with the other items in the fiscal cliff, although Republicans generally would prefer different tax cuts. “The payroll tax cut is not pro-growth,” he said.
House Republicans, meanwhile, haven’t yet come up with a position on the issue, aides said.
Still, J.D. Foster, a senior analyst at the Heritage Foundation, wrote last week that Congress and the White House should act quickly to prevent all of the tax hikes — including the payroll tax cut.
“In 2011 and in 2012, President Obama made a big deal demanding that congressional Republicans cooperate in preventing the same payroll tax jump then. What’s changed? Certainly not the unemployment rate, and certainly not the state of family finances,” he wrote in a blog post. Foster said in an interview that while payroll tax cuts aren’t the best for economic growth, they are important to working families.
“If what you’re doing is trying to help working families, it’s hard to do better than a payroll tax cut,” he said, adding, “If what you’re trying to do is help the economy, it’s hard not to do better than a payroll tax cut.”
Foster figures that either Obama or the Republicans will propose the extension before the election, and the other side will quickly back it.
“I’m not sure why anybody running for election or re-election would want to run on allowing a big tax hike on the middle class,” he said.
Foster says Republicans generally don’t like the payroll tax cut as much as other tax cuts and are still smarting from the beating they took on the issue last year — but he suggested they should beat Obama to the punch this time.
“This is a no-brainer for them,” he said.