Where's the surplus?

Despite efforts by Senator Baucus (D-MT) and Senator Grassley (R-IA) to draft a broad and bi-partisan federal legislation as part of another round of federal “stimulus” Senator Reid (D-NV) has now derailed the endeavor.  After eliminating most of the tax cuts in the bi-partisan effort put forward by Senators Baucus and Grassley, one of the few “tax cuts” Senator Reid has retained is the payroll tax holiday plan.

What is the Payroll Tax Holiday? Sec. 101 of the Hiring Incentives to Restore Employment (HIRE) Act outlines a suspension during 2010 on the employer share of the Social Security OASDI (Old-Age, Survivors, and Disability Insurance) payroll tax.  The OASDI payroll tax is normally divided into an employer and an employee share, where each is responsible for 6.2 percent on total payroll (or wages earned for employees).  Sec. 101 only applies to qualified employers hiring a qualified individual from February 3, 2010 to December 31, 2010.  It largely excludes public sector organizations hiring workers, except for “post-secondary educational institutions”.

How Will This Impact Employers? As evidence by continuing unemployment trends during 2009 and now into 2010, it is clear that firms have suspended hiring workers – and in many instances fired current workers – because of the significant drop in demand for goods and services.   In the absence of real demand for these firms’ products, it is reasonable to assume most employers will not react strongly to this temporary incentive to hire. Participating in the payroll tax holiday program will reduce the cost of labor during the eligible time frame, although temporarily and not by a large share.

How Is It Financed? The payroll tax holiday program will be financed with money from general revenues.  Specifically, those funds otherwise used from the Treasury—amounting to lost revenue in the Federal Social Security OASDI Trust Fund—will be “replenished” with equal amounts from the federal general revenue account.

Implications to Social SecurityThe Social Security system is effectively drained of real money.  In 2009, Social Security ran on a deficit of $4.3 billion, and by 2016, these deficits will continue to grow permanently. In 2020, the annual deficit is project to reach $68.5 billion. Financing deficits in one program with deficits from another – the White House has already released its $1.57 trillion federal deficit-spending agenda – means that the real cost of the proposed $13 billion of this hiring incentive plan will be much higher and permanently add to growing Social Security debt.  Moreover, any shift towards a partial general revenue financing arrangement of Social Security opens the way to a back-door tax increase that everyone will incur down the road.

Moving Forward.  At this nexus, Congress should concertedly reconsider passing a “jobs stimulus” plan that will 1) potentially create a net decline in employment, 2) fail to provide incentives for productive and permanent employment; and 3) contribute significantly to the on-going deficits in the Social Security system—especially if the financing involves deficit spending from general revenues.  A more promising message to employers of all sizes would be if Congress commits to reducing burdensome regulation, taxes, and federal government spending that all contribute to the crippling uncertainty of planning and operating a business.