By Alexander Bolton - 07/20/12 10:00 AM EDT
The emerging consensus in the Senate Democratic Conference is that the payroll tax holiday should not be extended for another year, even though the economy is slowing.
While job creation has fallen below 100,000 new jobs a month for the past three months, Democrats are worried about the impact on Social Security.
Sen. Sherrod Brown (D), who faces a tough reelection race in Ohio, said it would be wise to extend the payroll tax holiday another year as well as prolong unemployment insurance.
“I think it’s wise to do that, unemployment, all those,” he said.
But a growing number of Democrats say it is time to end the stimulus, which cut the payroll tax rate for employees from 6.2 percent to 4.2.
“We’re running into this problem. The critics said, ‘You’ll never get rid of it. It’s going to ultimately jeopardize the Social Security trust fund; the general revenue fund can’t continue to subsidize it.’ And we said, ‘No, it’s going to come to an end,’ ” said Senate Democratic Whip Dick Durbin (Ill.).
“In terms of whether we need more stimulus in our economy, I think we do. But in terms of using this against the Social Security trust fund, I think for credibility we have to keep our word,” he added.
Extending the payroll tax holiday for another year would cost an estimated $120 billion. The loss of revenue to the Social Security trust fund has been replaced with general treasury funds, adding to the federal debt.
The Senate Democratic Conference has not yet taken an official position on the issue, but lawmakers are leaning against a third extension, which is opposed by liberal defenders of Social Security.
“I think the consensus has been that the payroll tax cut should not be extended, but I would leave one escape hatch: what’s happening with the economy,” said Senate Budget Committee Chairman Kent Conrad (D-N.D.). “The thing that is hurting us right now is Europe, and the European situation is far from being resolved, and we know this could have continuing adverse impact on our economy.”
Conrad said if there is a sharp downturn in the European economy, “I don’t think we’d want any policy responses off the table.”
Democratic lawmakers say they do not expect President Obama to call for another extension of the payroll tax.
“The president has indicated that he has no intention of extending it and I will support him on that,” said Sen. Sheldon Whitehouse (D-R.I.).
“The way it was funded created concerns about Social Security that I think are very serious ones,” he added.
A White House official said there are other ways to give middle-class families tax relief.
“The payroll tax cut was intended to be a temporary measure to give middle-class families relief during these difficult economic times,” the official said.
“Though we haven't proposed extending the payroll tax cut beyond the end of the year, we have looked at many ways to ensure tax relief for the middle class, including pushing Congress to extend the Bush-era rates for 98 percent of families and extending the Earned Income Tax Credit, the Child Care Tax Credit and other tax-relief measures through next year,” the official added.
Congress passed a one-year payroll tax cut in December 2010 as part of a larger deal to extend the Bush-era tax rates and unemployment benefits.
Congress extended the payroll tax rate for two months at the end of last year and then for another 10 months in February.
Democrats championed the payroll tax break because its benefits went to middle- and working-class families at a time when Republicans refused to approve other stimulus proposals.
Economists estimated an average household earning about $50,000 a year would have $20 less to spend each week if the payroll tax break expired.
But Democrats are leery about the prospect of what was supposed to be temporary stimulus becoming permanent.
“I’m looking at the overall debt and deficit issue right now and I’m thinking at some point in time we have to bring this extension, the expanded payroll tax holiday, to an end,” said Sen. Kay Hagan (D-N.C.), who said she has not seen any proposals to extend it.
Sen. Joe Lieberman (Conn.), an Independent who caucuses with Democrats, questioned the payroll tax cut’s impact on the economy.
“It’s time to stop these partial, time-limited attempts to stimulate the economy,” he said. “To me, the best way to get the economy going again is to have a bipartisan long-term debt-reduction program because that will give business the confidence to invest money.”
Durbin, Conrad, Hagan, Lieberman and Whitehouse voted in February for the Senate-House conference report to extend the payroll tax holiday for 10 months.
Sens. Joe Manchin (D-W.Va.) and Bernie Sanders (I-Vt.), who voted against the extension, are still staunchly opposed to the policy.
Sen. Charles Schumer (N.Y.), the Senate Democrats’ chief political strategist, said it’s too early to decide the fate of the payroll tax holiday.
“I wouldn’t take it off the table right now. You have to see the status of the economy and the overall negotiations. But I wouldn’t put it on the table either. It’s premature to make a judgment,” he said.
Legislation to extend the Bush-era tax rates for households earning below $250,000, which Senate Democrats have circulated in recent days, does not include language on the payroll tax holiday.
Senate Majority Leader Harry Reid (D-Nev.) told reporters Tuesday that it would be addressed later in the year.
“Right now, we have a very clear picture what we want to do. What we want to do is make sure that people making less than $250,000 a year don't get a tax increase,” he said.
“There are other tax issues and we'll look at them,” he added.