Legislative Update: October 2012

Legislative Update: October 2012

TSCL Calls for End to Payroll Tax Holiday

By Jessie Gibbons, Legislative Analyst

For the past two years, nearly 160 million Americans have enjoyed a two percent Social Security payroll tax holiday, which has resulted in approximately $700 in annual tax relief in the form of higher paychecks for the average worker.  The measure was passed in 2010 in an effort to stimulate the sluggish economy, and it has been extended twice since then.  But the popular tax cut is set to expire on the first of January, and for four key reasons, The Senior Citizens League (TSCL) is urging Congress to let the tax holiday come to an end.

First, the payroll tax cut undermines the self–sustaining nature of Social Security and for the first time in more than seventy years, the program has become reliant on the federal government’s general revenues.  Under the law, the government must provide Social Security's Trust Fund with a dollar–for–dollar replacement for any lost revenues due to the tax cut.  In 2011, the government's reimbursement funds accounted for 13 percent of Social Security's income.  TSCL finds it troubling that the tax cut has disrupted the financing structure of Social Security, which has worked seamlessly since the program's inception.

Second, the federal government cannot afford the tax cut, which costs more than $115 billion annually.  It is no secret that our nation is deep in debt, and the two-year, two percent tax holiday has not spurred the economy as many hoped it would.  TSCL fears that, because of its economic constraints, the federal government's general revenues may not be a reliable source of funding for Social Security.  The program is currently facing a $45 billion cash-flow deficit, and an extension of the tax holiday could exacerbate its funding shortfall.

Third, extending the payroll tax cut could make a permanent cut more likely.  As of 2009, there were seventy–three "temporary" measures in the books — many of them are now considered as good as permanent.  Scott Hodge, the President of the Tax Foundation, recently warned lawmakers about the nature of temporary tax cuts.  He stated, "This is going to become a permanent law.  Once these things get … cooked in to the system, they're awfully difficult to get rid of."

Finally, there is little support for the tax cut among senior citizens.  The findings of TSCL's 2012 Senior Survey have indicated that nearly fifty–six percent of seniors disagree with the use of the payroll tax cut as a means to stimulate the economy.  Among those surveyed, only twenty-five percent said they agree with the use of the tax holiday.

For each of the reasons above, TSCL sincerely hopes that Congress will allow the Social Security payroll tax cut to expire at the end of this year.  Extending it for a third time would be irresponsible, and we fear that it could jeopardize the program's ability to fully pay Social Security benefits in the future.  To learn more about the tax cut and other issues affecting Social Security, visit our website.


Sources: "Implications of the Payroll Tax Holiday for Social Security," National Academy of Social Insurance, April 2012. "'Temporary' tax cuts plentiful, and often long term," USA Today, December 8, 2011.