Analysts Leery About Payroll Tax Holiday

By Jason Pierce | July 7, 2008 | 8:28 PM EDT

( - Is a month-long holiday from payroll taxes what America needs to stimulate its ailing economy?

The Senate Budget Committee's top Republican, Sen. Pete Domenici (R-N.M.) thinks so, but some policy analysts disagree.

Under Domenici's plan, American workers making less than $80,400 and their employers would receive a month-long reprieve from paying their FICA taxes, which are used to fund the Social Security retirement program. The money taken out of the Social Security trust fund would be replaced by general funds.

Also, the plan is designed to put money into workers' pockets in time for the Christmas spending season.

In a statement released the day Domenici introduced the plan, he said the payroll tax holiday could advance the economic stimulus package currently log-jammed in the Senate.

"A payroll tax holiday is truly a stimulative, temporary tax cut that is very likely to be spent," Domenici said. "Employees would have more take home pay and employers would have increased cash flow.

"This is a quick, easy and simple way of getting more money flowing into the economy. A payroll tax holiday in December would be perfectly timed for the holiday shopping season," he said.

However, analysts say the plan could disrupt the Social Security trust fund and be impossible to implement because employers would not be able to adjust their payroll systems in time for the holiday.

Scott Mezistrano, Manager of Government Relations for the American Payroll Association said the work involved in implementing such a plan would be a logistical nightmare for employers.

"The changes could be made on a three to six month notice, but certainly not as quick as December," Mezistrano said. "Employers, payroll service providers and payroll tax software developers are really scrambling to get all those year-end things done, like collecting all the information about benefits you may have gotten that need to get posted to your payroll and to get all the new withholding tables in place..."

Kathy Roeder, spokesperson for the AFL-CIO, said the payroll tax holiday would create much more work than it is worth.
"It's not the most effective means for economic stimulus," Roeder said. "It creates a lot of different levels where action has to happen that complicates and slows the process.

"It's an expensive proposal, when we have easier means to do one-time shots in the arm without messing with Social Security," she said.

But, Henry Aaron, Senior Fellow at the Brookings Institution said the plan would be a welcome alternative to the House economic stimulus passed last month.

"I think a rebate to individuals is probably a little overdue," Aaron said. "If this were a fiscal stimulus package in lieu of the total crap in the House bill, Mr. Domenici would be doing the administration and the nation a great favor by relieving them of the worst piece of legislation to come out of either houses of Congress in years.

"I think it is worth doing, it is feasible, and [would] politically save the administration," he said.

David John, Senior Policy Analyst at the Heritage Foundation warned that such a plan might look good now, but not so good later.

"It's a good idea if it's handled in the right way," John said. "This is one of those issues where the devil is in the details, and if it is not very carefully thought out, it could turn out to be much more of a problem than it might first appear.

"It's one of those ideas that is much more attractive as you say it than it is when you think it out," he said.