Payroll Tax Holiday Takes a Permanent Vacation

WASHINGTON – Wage earners have been surprised to rip open their first pay envelope of 2013 to discover their check provides less take-home money than anticipated – especially after being told the middle class was protected in the fiscal cliff agreement.

The reason is the big issue that both Democratic and Republican negotiators pointedly ignored during the seemingly endless balanced budget talks – the expiration of the two-year payroll tax holiday.

Beginning on Jan. 1 the payroll tax, also known as the Federal Insurance Contributions Act (FICA) tax, which is used to fund the Social Security system, jumped from 4.2 percent to 6.2 percent. Most of the estimated 160 million Americans who pay into the system will therefore see their anticipated income drop by 2 percent.

And there’s no reason to believe the money will be restored anytime soon. The reason, according to Donald Marron, director of the Washington-based Tax Policy Center, is simple – it “was always intended as a temporary tax cut to provide stimulus to the economy.”

As early as last February Treasury Secretary Tim Geithner indicated he would not recommend another extension of the cut that was first put into place in 2011.

“This has to be a temporary tax cut,” Geithner said in testimony before the Senate Budget Committee. “I don’t see any reason to consider supporting its extension.”

Heavy legislative hitters like House Democratic Leader Nancy Pelosi, of California, and Rep. Paul Ryan (R-Wis.), chairman of the House Budget Committee and his party’s 2012 candidate for vice president, likewise expressed a preference for letting it expire. Neither President Obama nor GOP presidential nominee Mitt Romney proposed an extension during the recently completed campaign.

The payroll tax holiday proved very expensive, reducing federal revenues by about $9 billion a month. While the Social Security system itself wasn’t affected – general revenues were used to compensate for the lost payroll tax monies -- it had a harsh impact on a U.S. Treasury that was already rolling up deficits. The holiday cost was an estimated $103 billion in 2011 and $112 billion in 2012.