A moderate Pennsylvania senator has offered legislation to end the impasse over continuing payroll tax cuts that have been in place since the first of this year.   Democrat Bob Casey, Chairman of the Joint Economic Committee, offered a compromise to Democratic and Republican legislation, each of which has been rebuffed in Senate votes over the last few days.  Among other changes, Casey's legislation resurrects a fee for Fannie Mae and Freddie Mac mortgage guarantees that was defeated in another context last month.

Background

Payroll deductions for FICA or Social Security are slated to return to 6.2 percent of salaries and wages on January 1 unless Congress votes to extend them.  FICA withholding was reduced by 2 percent for one year under the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010.  The payroll tax reduction along with extending unemployment insurance for long-term unemployed was the Democratic side of a deal that gave Republicans a continuation of the Bush era income tax cuts.

The reduction in withholding affects the first $106,800 in earned income.  Unearned income (capital gains, royalties, rents) as well as annual salaries and wages over $106,800 are not subject to FICA tax.  Expiration of the cuts is expected to cost the average employee $1,000 and those at the top of the wage scale will pay an additional $2,236 per year.

It should be mentioned that, while the cuts are to the FICA tax, it is merely a mechanism for transmitting the funds directly to individuals.  The Social Security Trust Fund is reimbursed from the General Fund.

Current Proposals

There has been little disagreement on Capitol Hill on the value of extending the tax reductions to stimulate the economy, but much dissention over both the size of the cut and ways to pay for it.  Under the original Democratic proposal the cut would be expanded from 2 percent to 3.5 percent for 2012 and, after input from Republicans, it was expanded to include a reduction in the portion of the tax paid by employers.  The program would be paid for by a 3.5 percent surtax on persons earning more than $1 million per year.  The Republicans countered with a proposal eliminating the surcharge, keeping the payroll tax at the current 4.1 percent level and paying for the bill by cutting extending the current two year federal wage freeze for another year, eliminating 10 percent of all federal jobs, and instituting means tests for Medicare, unemployment compensation, and food stamps. 

Details of Casey Proposal

Casey said that his compromise "attempts to bring Republicans aboard on the tax cut extension by trimming the cost of the package by roughly one-third and using bipartisan ideas to pay for it.  His legislation retains the 3.1 reduction in employee deductions for Social Security but eliminates the proposal to reduce the employer's portion of the FICA tax.  This will cut the cost of the package from $265 billion to $185 billion.  The larger reduction in the employee share is estimated to save the average employee an additional $500 above the 2011 cuts.

Casey's office says his proposal "adopts bipartisan deficit-reducing proposals from the Super Committee negations" to pay for the bill.  These include:

• Increasing the fees that Fannie Mae and Freddie Mac charge mortgage lenders to guarantee repayment of new mortgage loans. The final amount will be determined by the Director of the Enterprises (sic) but shall not be less than an average increase of 12.5 basis points for each origination year or book year above the average fee imposed in 2011 for a guarantee. This is expected to raise $38.1 billion. (A similar fee was eliminated at the last minute from H.R. 2112 which raised loan limits on FHA and VA loans which became law on November 18.)
• Keeps the surtax on high wage earners but reduces it from 3.25 percent to 1.9 percent, applies it to income over $3 million, and makes limits it to 10 years beginning in 2013.
• Includes a proposal made by Senate Minority Leader Mitch McConnell that would make millionaires ineligible for unemployment compensation and food stamps.
• Continues to ensure the stability of Social Security through reimbursements from the General Fund.

Casey said of his proposal, "As the clock continues to tick down, it is imperative that we come together now on a middle income tax cut.  The legislation is fully paid for and includes measures that have received bipartisan support in the past. It is time to act to help working families in Pennsylvania and across the country get back on their feet and jump start the economy. We can no longer afford to jeopardize working families in order to protect the wealthiest few."