Can Congress Ever Restore Payroll Taxes To Their Usual Levels?

Enlarge this image toggle caption Zhang Jun/Xinhua /Landov Zhang Jun/Xinhua /Landov

Republicans rarely meet a tax cut that they don't like. Now that they have found one, they are finding it politically impossible to stop it.

On Tuesday, President Obama called on Congress to extend a 2 percentage point reduction in payroll taxes, which fund Social Security. The cut, enacted last year, is otherwise set to expire at the end of the month.

The current cut means a savings of about $20 a week to a worker who earns $50,000 a year and about $2,000 a year to someone making $100,000.

House Republicans have already signaled that they will allow an extension through the end of the year. They were badly burned at the end of 2011, when the tax cut was originally set to expire and GOP members of Congress found themselves accused of wanting to raise taxes on working Americans.

That raises the question of when it's ever going to be OK to restore payroll tax rates to their usual levels — and what that will mean for Social Security's financing over the long haul.

Most Republicans still think the payroll tax cut is a bad idea precisely because it will eventually eat into Social Security's already precarious finances. They think it also has a limited benefit in terms of stimulating the economy. But they have calculated that the political costs would be too high to make a stand now.

"A lot of Republicans will think that extending it is not the best policy," says Andrew Biggs, a resident scholar at the conservative American Enterprise Institute and a former Social Security Administration official. "The question is whether it is so important to them to stop the payroll tax cut that they're willing to pay a massive political price to do so, and I would guess not."

That puts Obama and congressional Democrats in a good position. They get to extend an economic policy they like, while reaping political gains for doing so.

But even liberals are starting to worry that the payroll tax cut, which was always meant to provide a temporary boost to the economy, could be difficult to restore to historic levels.

For now, shortfalls in expected revenues for Social Security are being made up through general fund revenues. But over the course of the expected 10-month extension, that will add $100 billion to the federal deficit.

"There's a concern that, even though the Social Security trust funds are being held harmless for the time being, that might be difficult to do over the longer run," says Paul Van de Water, a senior fellow at the liberal Center on Budget and Policy Priorities, and another former Social Security Administration official.

Failing to raise the payroll tax back up, or making up the lost revenues through other means, would double the gap in long-term Social Security funding that already exists, Biggs says.

"You have a system that's running roughly a 2 percentage point deficit," says Eric Kingson, co-director of Social Security Works, an advocacy group. "You can't cut 2 percent more out of it without having a problem."

That has Social Security supporters nervous. Obama's budget, released on Monday, assumes that the payroll tax cut will expire in 2013. But observers already expect — even if the will is there to let the tax go back up at the end of the year — that it will not be done all at once, but rather in slow, phased increments.

Some, such as Van de Water, are also worried that increasing the payroll tax to its historic level will trigger a good deal of political bargaining.

Republicans may want to partially privatize Social Security accounts using the portion of taxes that are restored, while Democrats may seek to raise the current cap on salary levels that are subject to the payroll tax — in effect, seeking a tax hike on higher-income workers in exchange for letting taxes increase for everyone else.

Such bargaining would complicate an already contentious question — simply letting the payroll tax climb back up. What was once considered a normal rate will now be considered a tax hike. Reverting to the status quo is now politically dicey.

Kingson says he thinks Obama and other Democrats will allow the payroll tax cut to expire next January. Republicans may be happy to accommodate such a policy change, which they support anyway.

But Kingson worries that the politics of the issue may mean the tax cut will become enshrined as the new baseline expectation.

"If things go south on us, it has the potential to be very problematic for Social Security in the future by undermining its financing," he says.