Despite efforts by Senator Baucus (D-MT) and Senator Grassley (R-IA) to draft a broad and bi-partisan federal legislation as part of another round of federal “stimulus” Senator Reid (D-NV) has now derailed the endeavor. After eliminating most of the tax cuts in the bi-partisan effort put forward by Senators Baucus and Grassley, one of the few “tax cuts” Senator Reid has retained is the payroll tax holiday plan.
What is the Payroll Tax Holiday? Sec. 101 of the Hiring Incentives to Restore Employment (HIRE) Act outlines a suspension during 2010 on the employer share of the Social Security OASDI (Old-Age, Survivors, and Disability Insurance) payroll tax. The OASDI payroll tax is normally divided into an employer and an employee share, where each is responsible for 6.2 percent on total payroll (or wages earned for employees). Sec. 101 only applies to qualified employers hiring a qualified individual from February 3, 2010 to December 31, 2010. It largely excludes public sector organizations hiring workers, except for “post-secondary educational institutions”.
How Will This Impact Employers? As evidence by continuing unemployment trends during 2009 and now into 2010, it is clear that firms have suspended hiring workers – and in many instances fired current workers – because of the significant drop in demand for goods and services. In the absence of real demand for these firms’ products, it is reasonable to assume most employers will not react strongly to this temporary incentive to hire. Participating in the payroll tax holiday program will reduce the cost of labor during the eligible time frame, although temporarily and not by a large share.
How Is It Financed? The payroll tax holiday program will be financed with money from general revenues. Specifically, those funds otherwise used from the Treasury—amounting to lost revenue in the Federal Social Security OASDI Trust Fund—will be “replenished” with equal amounts from the federal general revenue account.
Implications to Social Security. The Social Security system is effectively drained of real money. In 2009, Social Security ran on a deficit of $4.3 billion, and by 2016, these deficits will continue to grow permanently. In 2020, the annual deficit is project to reach $68.5 billion. Financing deficits in one program with deficits from another – the White House has already released its $1.57 trillion federal deficit-spending agenda – means that the real cost of the proposed $13 billion of this hiring incentive plan will be much higher and permanently add to growing Social Security debt. Moreover, any shift towards a partial general revenue financing arrangement of Social Security opens the way to a back-door tax increase that everyone will incur down the road.
Moving Forward. At this nexus, Congress should concertedly reconsider passing a “jobs stimulus” plan that will 1) potentially create a net decline in employment, 2) fail to provide incentives for productive and permanent employment; and 3) contribute significantly to the on-going deficits in the Social Security system—especially if the financing involves deficit spending from general revenues. A more promising message to employers of all sizes would be if Congress commits to reducing burdensome regulation, taxes, and federal government spending that all contribute to the crippling uncertainty of planning and operating a business.
The Senate this week is considering amendments to Majority Leader Harry Reid’s (D-NV) legislation to raise the debt limit. Reid’s bill is a substitute to the version that passed the House, which would add $925 billion to the federal debt ceiling, but his would hike the limit by $1.9 trillion so that the Senate does not have to take another troublesome vote on the debt limit before the 2010 election.
Raising the debt ceiling to some degree is, unfortunately, necessary to avoid a default with perhaps catastrophic financial consequences for America. But at least the legislation has focused attention on the need for Washington to control its spending behavior. The issue is: What amendments can be added to the Reid bill to push Congress to face up to the spiraling fiscal problem?
Early on Tuesday, the Senate voted down an amendment offered by Senators Judd Gregg (R-NH) and Kent Conrad (D-ND) which threatened to take the wrong approach by creating a commission to address our debt problem.
Senate Finance Chairman Max Baucus (D-MT) made the prospect of any decisive fiscal action more remote by offering an amendment that would prohibit Congress from including Social Security in any budget legislation involving expedited procedures. Unfortunately, the Baucus amendment was agreed to by the Senate.
Removing Social Security from the discussion may be good short-term politics, but it is the three big entitlements – Medicare, Medicaid, and Social Security – that are the major drivers of federal spending. These three programs alone will cause spending to explode in the next few decades as the U.S. population ages and the cost of providing health care continues to climb.
The fiscal crisis the nation faces cannot be addressed unless these programs are significantly reformed, but Senator Baucus’ amendment rules out one-third of the equation out if expedited procedures are used—even though tax increases, for example, could be implemented under such procedures.
The Senate will very shortly vote on another Baucus amendment to create his version of a commission. If it is accepted by the Senate, a Bipartisan Task Force will be created to address the fiscal imbalance that threatens the financial future of our children and grandchildren. The task force he proposes is almost identical to the Conrad-Gregg version that has just been defeated. The only significant difference is that it removes that version’s requirement for Congress to use expedited procedures to consider the Commission’s recommendations. Like Conrad-Gregg, the Baucus commission would not reveal its plan until just after the November election. The plan could then be voted on by this Congress, including members who might well have lost their seats in the election because of their poor fiscal stewardship.
The most likely the result of the Baucus commission would be no congressional action at all on entitlement reform—while carrying the risk that it would provide cover to raise taxes.
This is the wrong way to conduct a commission, and it will do nothing to build the broad public support needed to confront the federal government’s spending addiction.