The stage is now set for a nasty battle about whether or not the final version of the phase four coronavirus economic stimulus package taking center stage in Washington D.C. in the next two weeks will include a controversial payroll tax cut being championed by President Donald Trump.
(• SEE UPDATE: Trump’s Payroll Tax Cut Dumped from Stimulus Bill)
President Trump met with Senate Majority Leader Mitch McConnell (R-KY) and House Minority Leader Kevin McCarthy (R-CA), and McCarthy confirmed to reporters after the meeting that the current version of the bill Republicans will present to Democrats this week as negotiations begin includes both the payroll tax cuts and direct payments, but a later tweet from Bloomberg News reporter Erik Wasson cautioned the payroll tax cut could still be removed before the draft is presented to Democrats.
Congresional aides caution that stimulus bill isn’t final until Senate GOP meets tomorrow on it. Payroll tax cut could still get left out even if In right now
— Erik Wasson (@elwasson) July 20, 2020
President Trump has made it clear he wants the payroll tax cut included in the final version of this next stimulus bill that will be hammered out in the next two weeks, and told Fox News Sunday, “I would consider not signing it if we don’t have a payroll tax cut.”
To date, this stand has drawn slim support at best from congressional Republicans while House Speaker Nancy Pelosi (D-CA), has outright said a payroll tax cut should NOT be included in the bill, setting this up as a red-line issue during negotiations.
A payroll tax cut would waive some or all of the FICA taxes (Social Security and Medicare) included in payroll, which amount to 7.65% of a typical employee’s paycheck. Employers pay a matching amount, while those who are self-employed pay both portions of these taxes. According to the most recent Social Security Trustees report, the payroll tax provided $944.5 billion in revenue for Social Security in 2019 while it paid out $1,048 billion in benefits.
President Trump has said he believes a payroll tax cut will stimulate the economy by providing workers with larger paychecks and businesses with lower payroll costs which could help them continue to pay employees and potentially hire/rehire more employees.
“President Trump wants to provide relief to hardworking Americans who have been impacted by this virus and one way of doing that is with a payroll tax holiday,” White House spokesman Judd Deere said Thursday. “He’s called on Congress to pass this before and he believes it must be part of any phase four package.”
Opposition is formidable
Democrats point out a payroll tax cut would do nothing for tens of millions of unemployed Americans, and, while helping those with jobs, would also amount to a tax cut for large corporations.
But perhaps an even bigger obstacle to Trump getting his way on this issue is the lack of support from Republicans. Many congressional Republicans have said they don’t believe it would be an effective tool to spur the economic recovery.
In the months since Trump first stated his desire for the payroll tax cut, numerous GOP lawmakers have gone on record saying they don’t think it would have the desired effect and other “arrows in the quiver” would have a bigger impact. Among them are Sen. John Barrasso (R-WY), Sen. Shelley Moore Capito (R-WV), Sen. Susan Collins (R-ME), Senate Majority Whip John Thune (R-SD), and Senate Finance Committee Chairman Chuck Grassley (R-IA), to name a few.
“I’m not a particular fan of that,” Thune, the No. 2 Republican in the Senate, told The Washington Post. “I guess I’m open to being persuaded that it’s something that could be effective, but I think some of the things that we are currently doing are having a bigger impact.”
Grassley said back in May he didn’t think much of the idea, worrying that it could drain retirement funds or leave older Americans with the view that Congress doesn’t take “seriously” the plight of the Social Security Trust Fund.
The Institute on Taxation and Economic Policy found that 65% of the benefits from a payroll tax cut would be drawn by the richest 20% of taxpayers. The Center on Budget and Policy Priorities (CBPP) notes that money from a payroll tax cut “would trickle out slowly, likely diluting its modest stimulus effect still further. For example, a payroll tax suspension would have to last more than 10 months before a full-time worker earning the federal minimum wage would receive $1,000 from it.”
Impact on Social Security
Of particular interest to the retirement planning community, a payroll tax cut would also mean additional stress for Medicare and Social Security, as the taxes collected go into those already challenged trust funds.
“Eliminating the payroll tax would sever the link between a worker’s contributions to Social Security and the benefits received, effectively ending Social Security’s status as an earned benefit,” CBPP said in a May 12 statement. “Without its dedicated revenues, Social Security would also no longer be self-financing; instead, it would rely entirely on general revenues and would have to compete with other programs for those resources. These changes, in turn, could increase pressure to cut Social Security benefits, as some policymakers have long proposed.”
The Senior Citizens League is on record as being opposed to a payroll tax cut as well.
“Today’s retirees—more than 61.2 million people—depend on Social Security and Medicare payroll tax revenues for their Social Security and Medicare benefits,” says Mary Johnson, a Social Security and Medicare policy analyst. “Their No. 1 concern is that down the line, benefits will be permanently cut to pay for these ‘temporary’ tax cuts.”
Johnson also said Social Security payroll taxes have already taken a huge hit this year due to tens of millions of people being out of work, meaning claims in 2020 are expected to grow faster than anticipated. Before the start of the coronavirus recession, many older workers may have delayed claiming Social Security to allow their benefits to grow.
“But those who lose their jobs may have to go ahead and claim Social Security benefits now because they can’t afford to wait—especially if their retirement accounts have gone down significantly in value as well,” Johnson says.
Negotiations take center stage
The Senate is back in session this week for the first time since before the Fourth of July, and all eyes are on what is expected to be two weeks of contentious negotiations to come to a consensus on this next massive stimulus bill before both chambers go back on recess.
While everyone seems to agree that another stimulus package is necessary and the clock is ticking with some CARES Act aid set to expire at the end of July, Pelosi has said she is willing to cancel or delay the House’s August recess scheduled to begin Aug. 1 if more time is needed to negotiate and pass the bill.
Treasury Secretary Steve Mnuchin said Monday President Trump has signed off on an effort to seek an additional $1 trillion in coronavirus economic relief, as the administration and Senate Republicans put forth their own bill to counter the House’s $3 trillion HEROES Act.
McConnell instantly labeled the HEROES Act, passed by the House in May, as “dead on arrival,” and Republicans have since been working on their own stimulus proposal without input from Democrats.
Any final bill to pass both the House and Senate is is likely to fall somewhere between the $1 and $3 trillion range, and likely below $2 trillion with Republicans dead-set against spending $3 trillion.
What remains to be seen is whether the payroll tax cut will make the final cut.
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
