Payroll Tax Holiday Takes a Permanent Vacation

“It was viewed as a temporary holiday, put in place for one year and extended for another but never meant to be permanent,” said Sen. Rob Portman (R-Ohio), director of the Office of Management and Budget for more than a year under former President George W. Bush. “It didn’t create a problem for the Social Security system in the sense that we needed to put general revenues into Social Security because there were fewer payroll taxes going into the Social Security trust fund.

“It was one of these things that on a temporary basis it was appropriate but over time it makes it more difficult to increase the solvency of Social Security on its own, which is kind of the goal on both sides of the aisle,” Portman told PJM. “And then, finally, there’s just the overall deficit problem. Coming out of general revenues makes it more difficult to get that under control.”

Portman said he doesn’t anticipate any effort to reinstate the holiday.

The FICA tax assesses a 12.4 percent tax on earned wages up to $113,700. It is split evenly between worker and employer, each picking up half the tab, or 6.2 percent.

Under the Tax Relief Unemployment Insurance and Job Creation Act of 2010, the worker’s share was reduced to 4.2 percent in 2011 in an effort to provide a boost to a sluggish economy, the thought being that taxpayers would use the extra take-home pay to purchase goods, thus acting as a stimulus by circulating money through the system. That provision was then extended for an additional year.

In 2012, about 75 percent of the nation’s tax units brought home an additional $770 on average as a result of the payroll tax holiday. A study by the Tax Policy Center found that the 2 percent increase will have the greatest impact on lower- and middle-income taxpayers.