Tableau! Extended Payroll Tax Cut + Sick SS Trust Fund + Keystone = Political Knavery

Tableau! Extended Payroll Tax Cut + Sick SS Trust Fund + Keystone = Political Knavery

Around this time last year, I wrote about the year-long payroll tax cut enacted by Congress under The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010  (P.L. 111-312) (the "Job Creation Act").  See "Just in Time for the Holidays: A Temporary Tax Compromise" (Lexis Tax Staff Analysis, Dec. 18, 2010).  I remarked then about my concerns over the deficit and my hope that legislators would consider more permanent and significant tax changes in 2011.  It was not to be, and so far the prospects for real tax reform in the coming year are not looking good.

The two percent decrease in the Social Security payroll tax enacted under the Job Creation Act was effective through the end of 2011.  The Temporary Payroll Tax Cut Continuation Act of 2011 (P.L. 112-78) (the "Continuation Act") extended the tax cut through the end of February 2012.  The Continuation Act ignored suggestions for tiered payroll tax reductions and a proposal for a surtax on people earning more than a million dollars per year in order to offset the payroll tax cut extension.  During Congressional deliberations, there was much talk regarding the payroll tax cut's potential to stimulate the economy, but very little discussion on the long-term impact to the Social Security system.

Franklin D. Roosevelt, who was responsible for Social Security, was quoted at the time of its enactment as saying "[I] put those payroll contributions there so . . . no damn politician can ever scrap my social security program."  The Social Security program was designed as a separate system, funded by a separate tax (the payroll tax), and this was intended to provide a certain amount of political protection.  Social Security has competed less with other priorities as a result of this separate funding mechanism.  Yet, this protection is slowly being eroded over time.  Ultimately, this could have dire effects on Social Security.

According to the Board of Trustees for Social Security and Medicare, Social Security ran a deficit in 2010 of $49 billion.  This is the first time the program has run a deficit since 1983.  The projected deficit for 2011 was $49 billion.  (See http://www.ssa.gov/OACT/TRSUM/index.html for a summary of the board's report.)  And what was the cost of the recent two-month payroll tax cut extension?  $19 billion in income lost to Social Security.  Younger generations are coming to expect that Social Security will never be a part of their long-term security blanket.  And older generations have to consider that Social Security may not provide the financial support they had anticipated. 

The political use of the Social Security payroll tax is especially concerning.  The Continuation Act also included a provision regarding the timing of a decision by the President on the Keystone XL oil pipeline.  A "hot button" issue the President vowed would not be included in any bill he signed prior to the November 2012 election, the Keystone project would carry shale oil from Canada.  Environmentalists have said it will endanger underground aquifers and it will not create the number of jobs predicted.  Because of the inclusion of the Keystone pipeline provision in the Continuation Act, Senate majority leader Harry Reid (D-NV) said the bill was dead before it ever got to the Senate.  One can never underestimate the power of politics.  The short term extension of the payroll tax cut makes more sense in the context of Keystone. It seems the Social Security payroll tax issue was deferred in part to compel the President to make a decision now on the controversial Keystone pipeline. 

The Keystone project may in fact see its way to fruition, but what of the Social Security issue and the government deficit?  With the November 2012 election looming, it is unlikely that the President of any of our elected Congressional representatives will want to tackle these politically charged issues before then.  Any chance for real tax reform, Social Security-related or otherwise, does not seem likely until at least next year. 

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