WASHINGTON -- House Republicans on Monday introduced a counter-offer to President Barack Obama's proposed solution to the so-called fiscal cliff, trumpeting that the proposal would not raise tax rates on personal income. The plan does, however, include a sizeable tax hike.
House Speaker John Boehner (R-Ohio) would allow the payroll tax cut to expire at the end of this year, an aide in his office told The Huffington Post. That would save the government an estimated $110 billion over 10 years, his office projected.
Because the payroll tax cut was already scheduled to expire at the end of this year, that $110 billion saving isn't counted by House GOP leadership as contributing to the $800 billion in revenue that it projects will come from its fiscal cliff proposal. The Republican plan calls for capping deductions, closing loopholes, and lowering tax rates. It also may give Republicans a technical out from anti-tax advocate Grover Norquist's pledge, which demands that signatories oppose tax hikes. Lawmakers, after all, aren't supporting a raise in the payroll tax; they would be letting it happen as scheduled under current law.
But that logic also applies to the Bush tax cuts on personal income, which are set to expire at the end of this year. And Republicans in Congress have been loathe to see those rates rise, arguing that it would constitute a tax hike and would be irresponsible in a weak economy.
Norquist has said in the past that he would be okay with the payroll tax cut expiring, provided it is replaced with a tax cut of similar size. His office did not return a request for comment.
Congress created the payroll tax holiday at the end of 2010 as a way of stimulating the economy by putting more money in consumers' hands. At the time, several Republicans told HuffPost they expect the policy's eventual expiration to be treated as a big tax hike.
"Once you bring a rate down, if it goes back up, people will feel that," Sen. Mike Johanns (R-Neb.) said. "They'll feel their paycheck being less and that argument eventually is bound to be made."
Since the tax cut, the average household has benefited from an extra $1,000 in annual income, and the federal government has replaced the diverted payroll income with general funds. Nevertheless, progressive advocates of social insurance programs have long worried that diverting money from the Social Security trust fund would hurt the program by weakening the connection workers feel between their contributions and their eventual payback.
The plan the Obama administration presented to House Republicans last week called for the continuation of the payroll tax cut or a replacement by a tax cut of similar size and design. The White House is attempting to navigate a potentially tricky political situation of its own. Some progressive members of the Democratic Party, as well as groups lobbying for seniors, have called for the payroll tax cut to expire, out of concern that its continuation would deplete or endanger the Social Security trust fund.
AARP, the powerful lobbying group for seniors that has loudly opposed continuing the cut past this year, reacted to the White House offer by praising the notion of an alternative to the holiday.
“AARP still believes that further extension of the payroll tax holiday would undermine confidence in Social Security and put at risk the program’s dedicated funding stream," AARP’s Cristina Martin Firvida said in a statement. "If a consensus emerges that the economy would benefit from continued tax relief to workers, that goal can certainly be achieved through alternative means other than a reduction in Social Security’s dedicated funding stream."
Other lawmakers and some liberal economists have countered that the payroll tax cut is an effective and proven form of stimulus and that eliminating it would pose a risk to the economy.
Jared Bernstein, Vice President Joe Biden's former chief economist, said in an email several weeks ago that he was "very concerned" about the tax cut expiration.
"It's a real whack at paychecks when that's something we should assiduously avoid (because the market's been tough on most people's earnings of late)," Bernstein said.