Tax Notes logo

Coronavirus Relief Package Lacks Payroll Tax Holiday

Posted on Mar. 13, 2020

The House is expected to approve a tax package aimed at helping the country deal with the coronavirus, but relief in the form of a payroll tax holiday or deferral isn't part of it.

House leadership was in constant contact with the administration March 12 to improve the Families First Coronavirus Response Act, introduced by House Democrats the day before.

The bill, introduced hours after President Trump addressed the nation in a televised speech, would provide paid sick leave, establish free coronavirus testing, boost unemployment insurance benefits, and expand food assistance for vulnerable children and families.

A vote had been expected in the early afternoon to allow members to go home for recess, but the administration and Republicans didn't agree to rubber-stamp the measure. House Minority Leader Kevin McCarthy, R-Calif., told reporters that Democrats crafted the bill without Republican input. Senate Majority Leader Mitch McConnell, R-Ky., said Republicans shouldn’t be forced to vote on a Democratic bill to battle the coronavirus.

Both chambers were expected to head into recess the week of March 16, but McConnell ensured that the Senate will be in session then to pass a coronavirus-related measure. A McConnell aide later said that lawmakers hope to get a bill approved March 16.

While both sides continued to haggle over the paid sick leave provisions in the bill, neither Democrats nor Republicans appeared overly concerned with including a payroll tax holiday being pushed by the administration.

Senate Finance Committee member Rob Portman, R-Ohio, said that with the limited time available to craft bipartisan legislation, committee members should focus on the crisis. “At this stage, [a payroll tax holiday is] not going to have the bipartisan support necessary,” he said.

Finance Committee Chair Chuck Grassley, R-Iowa, said that at this point, lawmakers are only looking at what the House has provided them with. Support for a payroll tax holiday remains limited among Democrats.

Finance Committee ranking member Ron Wyden, D-Ore., told Tax Notes that it makes no sense to temporarily cut the payroll tax because it won’t help gig workers and those who rely on tips. “It’s not going to happen on my watch,” Wyden said, rebuffing the idea that corporations should get tax relief during a health crisis.

Pricing Out the Holiday

The cost of a payroll tax holiday could also be prohibitive, according to the Penn Wharton Budget Model (PWBM) team.

A total payroll tax holiday through the end of the year would cost $807 billion, but it would have “very little net impact” on the economy in the short run and would reduce the size of the overall economy in the long run, according to a March 12 report.

Further, less than 2 percent of the overall tax cut would filter down to households in the bottom income quintile, and only about a third of the bottom quintile would see any benefit from the Trump administration’s proposal, PWBM found. That’s because many of the lowest-income households don’t have wages or self-employment income that would be subject to the payroll tax.

PWBM estimated that the average tax cuts would range from $320 for those in the bottom quintile to $4,240 for those in the middle quintile, and up to $70,175 for those in the top 0.1 percent.

The report notes that its model follows budget scoring conventions and assumes wages would rise in response to a cut in the employer side of the payroll tax, but Michael S. Linden, an economist with the Roosevelt Institute, said that scoring convention doesn’t hold up in this scenario.

The traditional economic theory behind the payroll tax is that while employers pay it, they simply take that cost out of the wages they pay their workers. Absent a payroll tax, employers would pay that amount directly to their employees, Linden told Tax Notes.

“But, critically, that’s a long-run assumption,” Linden said. Employers wouldn’t immediately raise their workers' wages by the amount of the employer-side payroll tax cut; rather, it would take time for wages to rise in response to the cut, he explained.

“If that reduction was explicitly temporary, then they almost certainly wouldn't raise wages at all. Can you imagine any company temporarily raising wages knowing that the tax is going to come back next year?” Linden mused.

For Linden, the employer side of the payroll tax cut ought to be viewed as a tax cut for the owners of businesses, and with capital ownership heavily skewed toward high-income households, “my guess is that it would make the distributional tables look radically different with way more of the tax cut going to the top.”

PWBM’s Richard Prisinzano acknowledged that Linden’s criticisms of the report’s modeling assumption have merit, but he defended the report as representing PWBM’s best understanding of the conventional modeling assumptions. He added that PWBM will issue another report using an alternate assumption — that employers keep all of their side of the payroll tax cut — on March 13.

Once that report is released, “we’ll get the bounds on either end: the employee's going to get all of it, or the employee’s going to get half of it,” Prisinzano said.

One way policymakers could address that regressive effect would be to pair the payroll tax cuts with a paid sick leave mandate, according to Prisinzano. “If you force [employers] to pay that money out in another way, you solve that. You’re basically saying, ‘We know you’re not going to adjust wages, but we’re going to require you to pay for sick leave,’” he said. 

Copy RID