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The Senate Takes a (Payroll Tax) Holiday

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Unread 12.22.11, 02:43 PM
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The Senate Takes a (Payroll Tax) Holiday

On 12.22.11 09:23 AM posted by J.D. Foster, Ph.D.

The political battle over extending the payroll tax holiday is understandably confusing for many Americans, so it is worthwhile to step back and see how we got into this mess. Americans have come to expect Washington’s lamentable dysfunction, but this instance is of a different sort than most.

First, the issue: A 2 percentage point cut in the federal payroll tax, enacted for 2011, is set to expire at the end of the year. The policy was dubbed a “holiday,” not because it was enacted during Christmas, but because it was supposed to be temporary. American workers were granted a holiday from a bit of the payroll tax. As most Americans likely understand by now, in Washington when a policy is labeled temporary, that means periodic fights to extend it—temporarily, of course.

Second, if the payroll tax holiday expires, American workers will see a nasty tax hike to start the new year. This would not be welcome to families struggling to pay their bills. It would also not be welcome to politicians in a year in which most will stand for re-election.

Thus, there is very broad agreement that the payroll tax holiday should be extended through 2012. The President called for that. The Senate supports it. The House supports it. The majority of Republicans support it. The majority of Democrats support it. Given all this agreement, why is the payroll tax holiday expiring? Obviously, this is not your typical Washington foul-up.

It’s important to remember that the payroll tax holiday has not and will not stimulate the economy as the President hopes. True, the economy appears to be finally showing signs of strengthening, and we should all be pleased at that. But if so, then it is strengthening because that’s what the U.S. economy does as it overcomes Washington’s past and current policy mistakes. The newfound strength, if true, is not due to the payroll tax holiday enacted last January. If the payroll tax holiday really worked to stimulate the economy, the effects would have been felt most in the second quarter of 2011—a time when the economy not only failed to accelerate, it nearly stalled out entirely.

Families are facing the possibility of higher taxes to start the new year because the Senate couldn’t wait to get to its Christmas holiday. Having waited to the 11th hour to take up the matter, the Senate found tough sledding as it tried to pass a one-year extension of the holiday the President asked for and on which nearly all concurred. But all the Senate could agree on was a two-month extension, merely buying a grace period for workers with the expectation that the Senate would then return to Washington to pass a bill to extend the holiday for the balance of the year.

But having passed this minimalist bill, the Senate did not wait to see what the House of Representatives would do. Forty-eight hours was all they needed to learn if the House would follow suit. It would have been wise to wait. Instead, Senate Majority Leader Harry Reid (D–NV) tried to jam the House as Senators bolted for the airports, trains, and highways for their cherished vacation.

The House, apparently made of stouter stuff, refused to take the easy road and so found a way to pass a bill extending the holiday for the full 12 months, as the President asked, not just the two months the Senate managed. And then the House had the audacity to call for regular order in this season of cheer, to proceed to a conference with the Senate, iron out the differences between the bills, and pass the result. Then and only then, having completed their work in good order, all the Members of the House and Senate could go home to enjoy the holidays having earned a small measure of joy, showing the nation they can get a few simple things done right.

Unfortunately, the Senate was gone. There was no one with whom to conference, and Senator Reid refused to call his body back into session. Apparently, once a Senator is home for Christmas, that’s it, even if it means risking higher taxes on working families.

And there the issue remains as Christmas and the new year approach. And, somehow out of all of this, President Obama and the mainstream media conclude that the House of Representatives, which followed the regular order, which passed the better bill with the full extension the President asked for, is at fault for the impasse.

In the end, this will be much ado about nothing. If, as expected, Congress fails to do the right thing to extend the payroll tax holiday before it expires, then Congress will come back to start the year and extend it retroactively, and hopefully the Senate can manage to do better than a measly two-month extension. This is no way to legislate, and it is all the more discouraging since all sides agree on the policy.

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