CRS Report Highlights Impact of Extending The Payroll Tax Reduction

To help stimulate the economy, Congress reduced the payroll tax for 2011 to 4.2% for employees and to 10.4% for the self-employed. Congress then extended the reduction for two months with the Temporary Payroll Tax Cut Continuation Act of 2011 (P.L. 112-78). As part of the agreement on the two-month extension, a conference committee is considering an extension of the payroll tax reduction.

The Congressional Research Service (CRS) released a report on the stimulative effects of an extension as well as offset options. Based upon a Congressional Budget Office (CBO) estimate that a temporary reduction of payroll taxes would raise output cumulatively in the next two years by $0.10 to $0.90 per dollar of total budgetary cost and would increase employment by between one and nine jobs per million dollars of budgetary cost, the CRS report states that an extension of the reduction in payroll taxes may be a cost-effective stimulus, compared with other household tax reductions, assuming that a majority of the increase in disposable income would be saved or used to pay down debt rather than spent on goods and services. The report cites CBO estimates finding that the short-term stimulative effect of an extension of the reduction in payroll taxes would be greater than the stimulative effects from extending the Bush tax cuts, on par with a one-year AMT patch, and less than an increase in refundable tax credits.

However, there is a concern that extending the payroll tax cut (est. cost: $99.5 billion) without an offset jeopardizes the goal of deficit reduction and signals a lack of resolve to reduce deficits to investors. The report discusses possible offsets options; none of which are considered agreeable by both parties.

Source: Thomson Reuters/RIA, 2/1/2012

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