Tax Notes logo

Trump’s Push for Payroll Tax Cuts Aligns With the CARES Act

Posted on July 21, 2020

President Trump has been pushing for payroll tax cuts for months and recently warned Congress that he may veto any COVID-19 stimulus package it passes that fails to include them. I’ve already shared my views on the bipartisan options, as well as some pros and cons, for cutting payroll taxes to help with the coronavirus economic crisis. And now I ask why Congress is risking a veto of the next phase of potentially essential COVID-19 legislation that would block policies like those that both Democrats and Republicans supported in the Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136).

Lawmakers of both parties said earlier this year that they would debate payroll tax cuts as part of future legislation after the first phase of COVID-19 relief was enacted via passage of the Families First Coronavirus Response Act (P.L. 116-127). Payroll tax reductions would grant employers an essential boost and help over 177 million U.S. wage earners who pay Social Security taxes. Reducing payroll taxes could improve the country’s economic outlook by giving employees and employers an immediate increase in wages received and paid of up to 7.65 percent each, or 15.3 percent for those who are self-employed, on all yearly wages below $137,701. That could greatly help lower- and middle-income wage earners. 

Most congressional arguments against payroll tax cuts are hypocritical because the cuts could stimulate the economy in many of the ways the CARES Act did. Under that legislation, Congress gave over 160 million stimulus checks to Americans and increased business interest expense deductions for large corporations, improving their spending ability to stimulate economic growth. Decreasing the amount workers and businesses lose from employee wages from payroll taxes could have a similar economic effect. Payroll tax cuts could increase individuals' ability to pay for excess child care and other quarantine costs as well as help employers remain afloat during the uncertain times ahead.  

Up for consideration in this fourth phase of COVID-19 relief are more stimulus checks, grants and loans, the extension of the Paycheck Protection Program, further expansions of interest benefits such as payment deferrals and interest and loss relief, the repeal of the $10,000 limit for state and local tax deductions, and importantly, another payroll tax relief proposal in addition to the deferral Congress already recognized would benefit the public. Both chambers of Congress were set to return to Washington this week.

The White House believes a payroll tax cut would put money in the pockets of working Americans and make more resources available for businesses to continue to hire. The White House isn't hiding the ball and is focused on the economy’s recovery generally, as opposed to more targeted provisions for those out of work or below the poverty line, as it was with the Tax Cuts and Jobs Act. But that doesn’t mean those most in need can’t be helped with other provisions that have already been implemented, along with payroll tax cuts, which are just one tool to further the aid during this crisis. 

The same elected officials who are objecting to the inclusion of a payroll tax are likely the ones who voted to give large corporations — those with more than $25 million in gross receipts generally — added income tax relief through increased interest deductions to increase their liquidity. The retroactive nature of the recently provided net operating loss benefits can give corporations a benefit of 35 percent on the dollar as opposed to the current 21 percent by allowing them to carry losses back to a pre-TCJA year to offset income in a year when the tax rate was 35 percent. Given that these CARES Act provisions were already supported by most of Congress in an attempt to improve economic conditions, it's a bit late (and possibly disingenuous) to cite the national deficit and a desire to target the poorest in rejecting Trump’s suggestion to minimize payroll taxes as has been done in the past, including by President Obama.

The CARES Act benefits to individual taxpayers, particularly those working in industries most affected by the crisis — e.g., hospitality, tourism, and retail — have been tempered by the increasingly delayed resumption of normal activities and the continued threat of layoffs or cuts in working hours. So it's difficult to find a clear reason why payroll tax cuts, which could provide immediate excess cash, shouldn't be provided. In fact, like other tax cuts in the CARES Act, retroactive relief could eliminate taxes on paychecks for the rest of the year as well as increase tax refunds. Any challenges in administering a payroll tax cut would be no more difficult than those for the retroactive benefits enacted in the CARES Act.

Yes, a payroll tax cut would do little to help the unemployed. If Congress is truly concerned about poor individuals, it can still expand and even enhance unemployment benefits by extending the Pandemic Emergency Unemployment Compensation program and related employment and medical benefits. Issues with employees with multiple employers can easily be reconciled on tax returns — as they already are for those who pay more than the required payroll taxes. Expansion of unemployment insurance benefits, tax credits to families and employers, or stimulus checks is progressive and can be used in concert with payroll tax cuts. 

The government shouldn't be overly concerned with increasing the national debt if doing so would meaningfully combat this unprecedented global economic crisis and allow us to bring our GDP back to normal levels more quickly and thus expand our tax base. As with the CARES Act, Republicans and Democrats should reach agreement — this time on reducing Social Security and Medicare payroll taxes to ward off a depression the likes of which we might never have seen before.

The Ever-Expanding Crisis

The recent concerns raised by those on the Hill about targeting the unemployed are largely the same as those expressed by the Urban-Brookings Tax Policy Center attributable to the 2011 payroll tax holiday. The payroll tax cut enacted under Obama was also more progressive than an across-the-board income tax cut. Workers received a tax break equal to 2 percent of earnings up to the Social Security cap in 2011, or $106,800. That smaller tax break grew out of the economic concerns regarding the eurozone, but this stimulus would be designed to ward off global economic catastrophe. 

The Social Security Trust Fund is routinely refilled out of general revenues, so the relevance here is unconvincing. That funding is by no means limited to payroll taxes. Tax reductions are a powerful fiscal tool, and payroll tax reductions could have a nearly instantaneous effect on businesses and wage earners at appropriate income levels through the Social Security cap of $137,700.

Unless Republicans and Democrats believe serious relief from this health and economic crisis is no longer needed, it's unclear why they wouldn't continue to buttress the policies they voted for in the CARES Act. Can members of Congress really say that the interest deductions large corporations benefited from were better targeted than payroll tax cuts to address those most in need? 

Are payroll tax cuts a good solution? It depends on the goal. They provide immediate economic stimulus, which is one thing Congress wants, and other goals, such as helping the unemployed, can be targeted with separate provisions. Should payroll tax cuts receive more bipartisan support than other provisions that have already received that support? Yes.  

Copy RID