The Big Story Blog

Payroll tax cut extension: Questions answered

Posted at 12:39 PM on December 23, 2011 by Paul Tosto
Filed under: Economy, Jobs and unemployment, Taxes

Leave it to the Brits to help easily explain U.S. politics and policy on the payroll tax cut extension approved today. The Guardian newspaper put together a nice set of answers to frequently asked questions after House Republicans Thursday agreed to a two-month payroll tax extension.

What follows are answers gleaned from the Guardian and from the Associated Press stories today on the passage of the extension.

What is payroll tax?
Guardian: It's the tax levied to pay for both the social security retirement fund and for Medicare, the federal-funded health plan. The current rate is 4.2%, following a temporary 2% tax cut that was passed before the Republicans took charge of Congress. The cut saved 160 million Americans an average of $1,000 a year, and was meant to give the economy a boost as the US fought its way out of recession.

What does this deal do exactly?
Associated Press: It will keep in place a 2 percentage point cut in the payroll tax -- a salary boost of about $20 a week for an average worker making $50,000 a year -- and prevent almost 2 million unemployed people from losing jobless benefits averaging $300 a week.

How's the extension paid for?
Associated Press:The two-month version's $33 billion cost will be covered by a .1 percentage point increase on guarantee fees on new home loans backed by mortgage giants Fannie Mae, Freddie Mac and Ginnie Mae -- at a likely cost of about $17 a month for a person with a $200,000 mortgage.

What would have happened without a deal?
Associated Press: If the cuts had expired as scheduled, 160 million workers would have seen tax increases and up to 2 million people without jobs for six months would start losing unemployment benefits averaging $300 a week. Doctors would have seen a 27 percent cut in their Medicare payments, the product of a 1997 cut that Congress has been unable to fix.

Anything else come with the deal?
Associated Press: Senate and House Republican leaders did win a provision that would require Obama to make a swift decision on whether to approve construction of the Canada-to-Texas Keystone XL oil pipeline. To stop construction, Obama, who had wanted to put the decision off until after the 2012 election, would have to declare that it was not in the nation's interest.

What was the basic disagreement?
Guardian: The economy is officially out of recession, but is still far from robust. Not all economists agree that payroll tax cuts really help, but politicians on both sides want to extend them. Having been skeptical of the tax cut's benefits, Republicans now want a one-year extension. The Democrat-controlled Senate passed a two-month extension proposed by Obama with the support of 39 Republicans.

So there isn't an argument?
Guardian: Oh, but there is. Republicans who control the House of Representatives tried to block the Senate deal. The fight looks set to be one of the defining arguments of 2012's election year - their capitulation to Obama's proposed extension represents a sorely-needed victory for the president. But the core disagreement remains: how to pay for the extension. Democrats have previously proposed a tax increase on personal incomes over $1 million. Republicans want spending cuts, and are set against a tax on the rich.


About Paul Tosto

Paul Tosto

Paul Tosto writes the Big Story Blog for MPR News. He joined the newsroom in 2008 after more than 20 years reporting on education, politics and the economy for news wires and newspapers across the country.