Medfield residents have reaped thousands of dollars in savings from a one-year cut to a federal payroll tax whose expiration looms Dec. 31.
Democratic and Republican leaders in Congress have agreed broadly on extending the temporary cut to the Social Security tax withheld from workers’ paychecks, but they disagree on how to pay for the measure.
The Senate on Saturday passed a two-month extension of the tax cut rather than a full year, along with a renewal of unemployment benefits. But the House rejected the bill after the Senate adjourned for the holidays.
For a Medfield resident earning the town’s median household income of $114,250, the payroll tax cut will yield about $2,136 in savings by the end of 2011. Without a deal to extend the cut, those workers will take home that much less next year, which comes to about $41.08 a week.
In a city like Boston, with a median income of $50,684, the tax cut means $1,014 in savings for a worker earning that salary by the end of this year. In Westwood and several other nearby wealthier suburbs — 32 in all — workers at median incomes upward of $106,800 qualify for the maximum tax cut of $2,136.
Massachusetts congressional representatives said extending the tax break is necessary to avoid raising taxes on workers as the economy remains fragile. Some said they would stay in Washington, D.C., as long as it takes to pass an extension even as a holiday recess nears for Congress.
“We’ll stay here forever to get this done, right to the end,” said U.S. Rep. John Tierney, D-6th.
Several Bay State economists and researchers agreed the tax cut should stay through 2012.
“The extension of the payroll tax holiday is critical because it helps free up some resources among the middle class, who are still very heavily burdened by massive debt,” said Christian Weller, an economist and public policy professor at UMass-Boston and a senior fellow at the Center for American Progress.
Proposals from both parties failed to pass the Senate earlier this month, including President Obama’s proposal to expand the tax cut and pay for it largely with an income surtax on millionaires.
The Republican-controlled House passed a bill Dec. 13 to expand the tax cut as is, but it stalled in the Senate. All Bay State representatives voted against the bill, which included several measures that Democrats opposed.
Among them were sped-up approval for an oil pipeline from Canada and an attempt to cut the maximum duration of unemployment benefits from 99 weeks to 59. Bay State representatives roundly slammed the legislation, and all criticized the idea of cutting unemployment benefits.
But leaders of both chambers struck a more conciliatory tone later in the week. Several news reports said Democrats had dropped their call for a millionaire surtax, which Republicans opposed, and would consider a short-term extension instead of a full year.
Most Bay State representatives said they would have supported the surtax, but were willing to take it off the table if it means passing an extension.
However, several representatives said they had yet to see other ideas to fund the tax cut that they could support.
U.S. Rep. Stephen Lynch, D-9th, said a steady, reliable source of funding should replace Social Security revenue lost in the tax cut. This year, the government made up the loss through borrowing.
“We’re really flirting with disaster here if we continue to divert money away from Social Security,” Lynch said.
Lynch opposed the Republican bill to extend the payroll tax cut.
“The general idea of a tax cut is certainly OK, especially in this economy,” he said. “But the way they went about it in the Republican proposal was, in order to sort of pay for the tax cut, in order not to reduce the amount of money in the Social Security trust fund, they basically cut unemployment benefits for about 1 million workers.”
The bill also included other issues that were extraneous and didn’t ask wealthier Americans to make any kind of contribution, Lynch said.
Asked if a compromise on extending the tax break is near, Lynch said he wished he knew the answer. “There are so many moving parts,” he said, noting efforts to pass a stopgap spending bill to avoid a government shutdown.
He said he hoped to address the payroll tax extension as part of the broader budget.
“There are a lot of variables, a lot of things that we can trade off to try to get that without cutting unemployment benefits,” Lynch said. “I mean, come on. We’ve got a lot of workers out there that have been unemployed a long time.”
In a recent “Congress on Your Corner” tour, Lynch said he visited 19 towns and two cities in an RV. He said he spoke to many people seeking work.
“These are not college kids,” he said. “I had nurses with 14, 15 years experience, teachers with 18 years experience, insurance executives with 15, 20 years experience.”
“That critical safety net for unemployed workers is very, very important right now,” Lynch said.
Lynch said he doubts the payroll tax is a major economic stimulus. “What I think it provides is a little bit of relief — very little,” he said.
Lynch said he voted against the payroll tax cut last time around out of concern about undermining Social Security funding.
“I don’t agree with the tactic of providing this very small amount of stimulus with the end effect of weakening the Social Security trust fund,” he said.
Congress needs a “thoughtful, deliberative” approach to paying for the tax cut, Lynch said. A surtax on millionaires would have been predictable, reliable funding, he said.
“It’s tax revenue for tax revenue,” Lynch said. “In other words, you’re reducing the tax revenue on one side from a general standpoint and you’re replacing that with another stream of tax revenue.”
The tax cut this year reduced the amount withheld from workers’ paychecks to fund Social Security from 6.2 percent of their wages to 4.2 percent. The benefit is capped on the first $106,800 of a worker’s income.
Economists and researchers said the measure helped put some extra money in workers’ pockets. Based on median household incomes, the weekly savings in Massachusetts range from about $12 to $41.
Employees likely put that money toward expenses or paying down debt, rather than saving it, researchers said.
“There’s some evidence that suggests it’s one of those pieces of stimulus that quickly becomes consumption,” the desired effect, said Stephen Poftak, research director for the conservative Pioneer Institute.
However, Poftak said reducing funding to Social Security over the long term without addressing the loss would be fiscally irresponsible.
Weller said the tax cut mainly helps the middle class to pay down debt, which ultimately could signal to businesses they have more to spend, spurring hiring and growth.
“The longer households are worried about their debt, they’re not going to be consuming as much,” he said.
Savings from the payroll tax cut are significant for the average worker, and failing to extend it could have a “significant impact” on the economy, said Alan Clayton-Matthews, a professor at Northeastern University’s School of Public Policy and Urban Affairs.
“The stimulus is needed,” he said. “How we get it is not as important as the need for it.”
Also seen in Wicked Local: Medfield Press.