Payroll Tax Cut for Firms Axed

U.S. Senate Majority Leader Harry Reid will abandon a plan to lower the payroll tax for employers and focus on continuing and expanding the current tax cut for workers, according to a Democratic aide.

Reid will propose reducing the payroll tax paid by employees to 3.1 percent for 2012 from the current 4.2 percent, said the aide, who wasn't authorized to discuss the plan publicly. Eliminating the provision to reduce the payroll tax for employers will reduce the package's cost to about $180 billion over 10 years from $265 billion, the aide said.

Democrats plan to offset the proposal by imposing a surtax on annual income exceeding $1 million. The aide said the surtax would likely be less than 2 percent, lower than the 3.25 percent levy Democrats had sought.

The proposal is being offered after the Senate blocked competing measures sponsored by Democrats and Republicans last week. Reid is revising the Democratic measure in an attempt to build pressure on at least a few Republicans to support the bill. Democrats control 53 seats in the Senate and will likely need to secure 60 votes to win passage of the legislation.

“Raising taxes by $1,000 next month will have an immediate negative impact on the economy,” Reid said on the Senate floor today. “We all know Congress can't afford to play chicken with this economy.”

Reid's proposal will end the millionaire surtax after 10 years instead of making it permanent, as Democrats previously sought. He will propose means testing for food stamps, a provision Republicans included in their plan. Reid's plan won't require high earners to pay higher Medicare premiums, as Republicans had proposed.

President Barack Obama said Republicans would be “leaving 1.3 million Americans out in the cold” next month if they allow the payroll tax cut to lapse.

“It's important insurance for them against the unexpected,” Obama told reporters today. “It will spur spending. It will spur hiring and it's the right thing to do.”

Unless Congress acts, the current payroll tax cut — which lowered the employee portion of the Social Security payroll tax from 6.2 percent to 4.2 percent for 2011 — will expire on Dec. 31. Mark Zandi, chief economist at Moody's Analytics, has said failure to extend the payroll tax cut into 2012 could cause the U.S. gross domestic product to decline by at least one-half of one percentage point during 2012.

Millionaire Surtax

With the millionaire surtax, Reid's measure will encounter resistance from Republicans who have said such a provision will hurt small business owners who record business income on their individual tax returns. Don Stewart, a spokesman for Senate Minority Leader Mitch McConnell, said Republicans haven't seen the details of the proposal.

“But I do know that the only thing bipartisan about adding a tax hike on job creators is the opposition,” he said in an e- mailed statement.

Senator Orrin Hatch of Utah, the top Republican on the Senate Finance Committee, criticized the surtax proposal in an e-mail, calling it a “permanent tax hike on small businesses to pay for temporary one-year tax policy.”

Republicans in the U.S. House of Representatives plan to propose legislation in coming days that would extend the existing 4.2 percent payroll tax rate for one year for employees. House lawmakers also will seek to avoid cuts to physician reimbursements by Medicare and address unemployment benefits that are slated to expire at the end of the year.

Reid will include some mandatory spending reductions that the congressional debt-cutting supercommittee considered before it reached an impasse last month, said the aide, without saying which provisions were being considered.

Bloomberg News

Complete your profile to continue reading and get FREE access to Treasury & Risk, part of your ALM digital membership.

Your access to unlimited Treasury & Risk content isn’t changing.
Once you are an ALM digital member, you’ll receive:

Thought leadership on regulatory changes, economic trends, corporate success stories, and tactical solutions for treasurers, CFOs, risk managers, controllers, and other finance professionals
Informative weekly newsletter featuring news, analysis, real-world case studies, and other critical content
Educational webcasts, white papers, and ebooks from industry thought leaders
Critical coverage of the employee benefits and financial advisory markets on our other ALM sites, PropertyCasualty360 and ThinkAdvisor