Trump Pursues Payroll Tax Cut as GOP, Democrats Look Elsewhere

(Bloomberg) -- A big cut in the payroll tax is high on President Donald Trump's wish list for the next coronavirus response bill, but the idea is getting the brushoff from newly-cost-conscious Republicans and Democrats who would rather send aid to people who aren't getting a paycheck.

Trump has backed a payroll tax cut since long before the pandemic brought the economy to a halt and threw millions of people out of work. He suggested the idea in August 2019 as a way to boost the economy and tried to include it in the $2.2 trillion stimulus bill passed in late March. Congress instead opted to send $1,200 individual payments to middle- and low-income adults instead.

“I like the idea of payroll tax cuts. I've liked that from the beginning,” Trump said Tuesday. “A lot of economists would agree with me. A lot of people agree with me.”

Wide divisions in early talks on the next aid legislation suggest that any deal may require time and perhaps even more intense negotiations than the first four bills. Those bipartisan bills to boost the economy totaled $2.9 trillion, massively increasing the federal deficit in a time of grave national emergency.

Payroll taxes -- the 6.2% levy on wage income up to $137,700 that finances Social Security -- are paid by the vast majority of American workers. Employers pay an additional 6.2% tax for their employees. Gig economy workers, such as drivers for Uber and Lyft and other contractors, are supposed to pay the employee and employer portions of the tax.

State, Local Aid

Not many lawmakers have publicly backed Trump's proposal for a payroll tax cut. House Democrats seek more money for struggling state and local governments and a second round of direct payments to individuals. A payroll tax cut isn't on the list because people without jobs wouldn't benefit.

Senate Majority Leader Mitch McConnell says he wants less costly legislation that would encourage companies to reopen by shielding them from lawsuits by employees or patrons who may be exposed to the virus.

GOP Senate Finance Chairman Chuck Grassley's spokesman Michael Zona said it's too soon to know what any legislation would encompass and that it should address “any ongoing problems in an effective manner.”

House Ways and Means Chairman Richard Neal, a Democrat, rejects a payroll tax cut. Instead, he proposes sending another round of direct payments to individuals and expanding a separate tax credit for employers who keep workers on the job, according to spokeswoman Erin Hatch.

Garrett Watson, a senior policy analyst at the right-leaning Tax Foundation, said a payroll tax cut is “not well targeted. With unemployment between 10% to 20% range, those who are unemployed are going to be left out of the relief.”

Effect on Employment

Economic literature also suggests “there isn't much effect on employment or stimulative demand,” Watson said. “From an economic growth perspective, a payroll tax cut just doesn't translate to long-term employment numbers.”

Economist and longtime tax-cut proponent Arthur Laffer has been pushing the White House to consider a negative payroll tax, which would effectively provide a subsidy to businesses and their employees for the rest of the year.

Congress has already addressed some business concerns about paying their payroll taxes while they're shut down. The March stimulus bill lets them defer paying the employer-side part of the tab for the rest of this year and repay those levies in 2021 and 2022.

Using the payroll tax system to provide further relief to companies does have some appeal in both parties. Senator Josh Hawley, a Missouri Republican, has a plan that would repay 80% of some companies' payroll. Representative Pramila Jayapal, a progressive Democrat from Washington state, has a plan to repay 100% of payroll for companies that meet a strict standard of lost revenue. Both plans set limits on replacing wages for high earners.

Any of those would come with a large price tag that could total well into the hundreds of billions of dollars depending on how many companies would be eligible for the benefit.

‘Welfare Payment'

Suspending payroll taxes for three months would cost $300 billion, according to the nonpartisan Committee for a Responsible Federal Budget. A negative payroll tax would cost even more.

“A negative tax is effectively another form of welfare payment,” said David McIntosh, president of Club for Growth, which supports lower taxes and reduced government spending. “Let's remove the cost and let the market work. That will work much better than playing around with the tax code.”

McIntosh also said such a move could have big consequences for the Social Security trust fund, a concern shared by more left-leaning economists worried that diverting revenue from it could lead to insolvency problems more quickly than currently predicted. Hawley's office said his plan would include provisions to replenish the trust fund, as has been done in previous bills.

“I'm worried that this is just furthering a longstanding Republican goal: cutting Social Security and privatizing it,” said Dean Baker, a senior economist at the Center for Economic and Policy Research.