Legality of potential payroll tax move seen as ‘dubious’

Trump allies push to suspend payroll tax if Congress won’t; experts from right and left say they’d be on shaky ground

Stephen Moore, pictured in a 2016 interview with CQ Roll Call. (Tom Williams/CQ Roll Call file photo)
Stephen Moore, pictured in a 2016 interview with CQ Roll Call. (Tom Williams/CQ Roll Call file photo)
Posted August 3, 2020 at 3:05pm

Tax policy experts doubt that President Donald Trump has the authority to unilaterally suspend payroll tax collections, an idea floated by White House economic adviser Stephen Moore over the weekend.

In a Wall Street Journal opinion piece, Moore wrote that the president should declare a “national economic emergency” due to COVID-19 and use emergency powers that allowed the IRS to delay tax filing deadlines earlier this year to also suspend payroll tax collections for up to one year. Moore doesn’t have a formal role in the Trump administration but is a member of the president’s economic recovery task force.

Moore’s reading of the law drew criticisms from tax experts at both the conservative American Enterprise Institute and the Urban-Brookings Tax Policy Center, a nonpartisan think tank backed by the center-left Brookings Institution and the Urban Institute.

Mark Mazur, director of the Tax Policy Institute, who was assistant secretary for tax policy during the Obama administration, said only Congress could halt the collection of taxes.

“No one really has the authority to not collect taxes,” he said. “We collected taxes during World War II.”

Since the economy went into decline during the pandemic, Trump has been advocating a “payroll tax holiday” but has gotten little interest from either the House or the Senate. Trump said Monday that he was considering taking some actions on his own to circumvent Congress, where top Democrats are at loggerheads with the White House over a new relief package.

“I have a lot of powers with respect to executive orders, and we’re looking at that very seriously right now,” Trump said, although he wasn’t specific on whether he meant just extending the temporary moratorium on evictions or a broader set of actions.

Economists complain that suspending employees’ 7.65 percent payroll tax contribution is a slow way to get money into peoples’ hands — certainly much slower than the tax rebates approved in the $2 trillion March aid law and proposed by both chambers for the next round of relief.

Those $1,200 payments were distributed in lump sums, while payroll tax cuts accrue slowly in each paycheck. Workers currently pay 6.2 percent on wages up to the first $137,700 in 2020 to finance Social Security, plus another 1.45 percent on all wages that goes into Medicare’s hospital trust fund. Upper-income workers pay another 0.9 percent Medicare tax on earnings above $200,000.

Moore, a conservative economist, wrote the opinion piece along with Phil Kerpen, president of the Committee to Unleash Prosperity. Moore is a co-founder of the committee, which promotes a flat tax, less federal spending and less regulation. One of the other co-founders is conservative economist Arthur Laffer.

Moore and Kerpen wrote that they’d tailor the payroll tax suspension to workers making $75,000 and below, which is the same threshold for individuals to receive the maximum tax rebate in the March law and current proposals. But a payroll tax cut would do little for those who have lost their jobs or who are retired.

The authors pointed to Section 7508(a) of the tax code as the president’s authority for suspending payroll tax collections. They note that this section was cited by the IRS when it postponed filing deadlines from April 15 to July 15.

The order they cite postponed until July 15 the deadline for “filing Federal income tax returns and making Federal income tax payments due April 15.” However, the order went on to say it “does not apply with respect to any other type of Federal tax.”

Mazur said Moore and Kerpen are mixing two very different circumstances.

“You had a situation where the IRS was unable to accept the returns that came in the mail” because IRS employees had been sent home, Mazur said of the situation in April when unopened mail piled up at IRS offices.

But now, the IRS is perfectly capable of collecting these taxes, most of which are paid electronically as part of business payrolls, he said. To suspend collections would take an act of Congress, Mazur added.

Kyle Pomerleau, an economist and resident fellow at AEI, wrote in an email that the IRS has some limited authority to suspend or delay tax payments and accelerate refunds for those in federally designated disaster areas. But he said Moore and Kerpen were on “dubious” legal ground, particularly when it comes to their proposed $75,000 income threshold to avoid benefiting wealthier earners.

“I don’t think the IRS can unilaterally say ‘those with incomes under $75,000 don’t have to pay, but everyone else has to,’” Pomerleau wrote. “This sounds like something that needs to be done by Congress.”

Another problem is what to do about any forgone revenue into the Social Security and Medicare trust funds. In the past when Congress enacted payroll tax cuts, lawmakers had appropriated general fund revenue to keep the trust funds whole.

A spokeswoman for Rep. John B. Larson, D-Conn., who is chairman of the House Ways and Means Social Security Subcommittee, said he doesn’t believe Trump has the authority to enact the payroll tax change without Congress.

Niels Lesniewski contributed to this report.