Webster’s New World Dictionary defines the word “dilly-dally” to mean “to waste time in hesitation or vacillation.” Whether we use that word or words like procrastinate, dawdle, filibuster or stall, Washington DC is certainly dragging its collective feet on the question of the payroll tax holiday.

The basic issue is whether the one-year 2% employee payroll tax holiday in effect for 2011 will be extended, ended or expanded.

While at least 4 scenarios could play out on Capitol Hill, about one thing we can be certain: the employee payroll tax in 2012 will not revert back to 6.2%. As confident as we can be that the sun will rise in the morning, we can be confident that Congress will not increase payroll taxes in a presidential election year. A 2% “increase” in the payroll tax rate next year would translate into a $900 tax hike for the average household. It’s not going to happen. Read more.

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Payroll Tax Holiday: Congress Dilly-Dallying

Fri Dec 2, 2011

Webster’s New World Dictionary defines the word “dilly-dally” to mean “to waste time in hesitation or vacillation.” Whether we use that word or words like procrastinate, dawdle, filibuster or stall, Washington DC is certainly dragging its collective feet on the question of the payroll tax holiday.

The basic issue is whether the one-year 2% employee payroll tax holiday in effect for 2011 will be extended, ended or expanded.

While at least 4 scenarios could play out on Capitol Hill, about one thing we can be certain: the employee payroll tax in 2012 will not revert back to 6.2%. As confident as we can be that the sun will rise in the morning, we can be confident that Congress will not increase payroll taxes in a presidential election year. A 2% “increase” in the payroll tax rate next year would translate into a $900 tax hike for the average household. It’s not going to happen.

So why the delay? What are the likely scenarios? When will all this be resolved?

To answer the last question first, this issue will be resolved by December 16—to give payroll systems time to put new payroll tax withholding in place by January 1, 2012.

Why the dilly-dallying? Perhaps the main reason why this issue is percolating into December is that back in September President Obama proposed, as part of his “Jobs for Americans Act,” not just an extension of the 2011 payroll tax holiday but a major expansion to stimulate the economy.

 

The “Pay-For”—

Further complicating things is that, because annual federal budget deficits are forecast in the $1 trillion range and the government’s public debt has topped out at a record $15 trillion, any tax cut must be “paid-for” by offsetting spending cuts or tax increases. It’s estimated that extending the 2% payroll tax holiday through 2012 would cost the Social Security Trust Fund a minimum of $120 billion—which of course the U.S. Treasury would make up for out of general tax revenue.

President Obama’s proposal to “pay-for” an expansion of the payroll tax holiday by capping income tax deductions at 28% was dead-on-arrival on Capitol Hill, so Congress needs to find some other way to offset the budget impact of any 2012 tax holiday.

 

Competing Scenarios—

What are the possible scenarios that will play out in the next two weeks?

First, President Obama and Congress could agree simply to extend the 2011 2% payroll tax holiday through 2012. This is the most straightforward scenario and, most importantly, insures that worker payroll taxes don’t rise starting on New Year’s Day.

Second, it’s possible that Congress will agree to the President’s September proposal to expand the payroll tax cut to 3.1% instead of 2%.

The two-fold difficulty with expanding the payroll tax cut is that, (1) it requires an even larger “pay-for” since the budget cost could easily reach $150 billion; and (2) it punches a bigger hole in the Social Security Trust Fund, already on shaky solvency ground. It’s also not clear that a 1.1% difference in payroll tax withholding, spread out over perhaps 25 biweekly payroll periods, is going to have much impact on consumer spending.

A third scenario is that the payroll tax holiday, either 2% or 3.1%, could be extended to employers, as President Obama has proposed, in order to encourage new hiring. The President’s proposal was to set the employer Social Security tax at 3.1% for 2012, but only on the first $5 million in wages paid—to target the incentive at small business. In any event, expanding the payroll tax cut to employers significantly increases the cost.

Fourth, a new, high-powered employer payroll tax holiday could be enacted, again as the President proposed in September, by creating a special 100% employer Social Security tax “refund” on up to $50 million of increased wages paid in 2012 over 2011, for a maximum employer payroll tax break of over $3 million for 2012. More complicated to administer, a one-year employer payroll tax refund tied to a wage increase ceiling would break new compliance ground and probably put the total package cost in the $250 billion range.

 

A Prediction—

The competing scenarios hopefully explain why Capitol Hill democrats and republicans have delayed action on the President’s proposal to extend and expand the payroll tax holiday. But turning a page on the calendar to the month of December should remind lawmakers that time is running out to decide.

The 2011 holiday was enacted on December 17, 2010—at the “last minute” from a payroll compliance standpoint. It’s now time for Congress to shift from “Park” to “Drive” and resolve this question.

Mindful of the risks to the Social Security Trust Fund and the huge impact even modest payroll tax cuts have on the federal deficit, it’s likely that Congress will be cautious about expanding the Social Security tax holiday; and extra cautious about extending it to employers.

All this suggests that Scenario One above is most likely to play out in the next two weeks. Congress can always surprise; President Obama could insist on 100% of his September proposal—3.1% for employers and employees and a full refund on increased wages up to $50 million. That would be the all-too-familiar gridlock scenario and mean more procrastination.

On the other hand, no one wants payroll taxes to go up starting in January and a reasonable compromise would be to extend existing law for another year. That’s a sensible scenario for the Holiday Season and sure beats endless dilly-dallying.