What's Really at Stake in the Payroll Tax Fight -- And Why It Isn't Over

January 13, 2012, 6:18 PM GMT+0

Next month, Congress will once again face the question of how to extend a temporary payroll tax cut that has been in effect for the past year. Republicans tried their best to duck that debate—and with good reason. As long as the issue is framed in terms of how to extend the payroll tax cut, they are unlikely to prevail. And if they lose, what is supposed to be a “temporary” extension could turn out to provide a significant precedent for a long-term shift in the progressivity of the American tax system.

A few weeks ago, House Republicans grudgingly accepted a two-month extension of the 2011 payroll tax cut, which temporarily reduced the tax rate from 6.2% to 4.2%. In tactical terms, this was widely portrayed as a victory for President Obama and his Democratic allies. The controversy and its resolution helped change Obama’s image “from compromiser in chief to determined voice of economic populism,” according to one press report. Another claimed that “House Republicans were forced to make humiliating concessions to Democrats over the extension of a payroll tax holiday and unemployment benefits, dinging the party’s tax-cutting brand.”

A YouGov survey conducted during the midst of the legislative battle asked about two different proposals to extend the payroll tax cut. One, floated by Democrats, would offset the extension “by imposing a new tax on incomes in excess of $1 million.”  The other, offered by Republicans, would offset the extension “by freezing the pay of federal employees and gradually reducing the federal work force.” Examining responses to both these questions simultaneously sheds considerable light on the dynamics of public opinion underlying the payroll tax controversy. 

First, it is worth noting that fewer than half of the YouGov respondents fell clearly in either partisan camp: only 19% supported the Democratic proposal and opposed the Republican proposal, while only 16% supported the Republican proposal and opposed the Democratic proposal. Another 21%—call them the “just get it done” contingent—supported both proposals, while 6% opposed both proposals (or strongly opposed one without supporting the other). The largest single contingent—27% of the respondents—seem not to have been engaged much one way or the other; they expressed no strong view about either proposal and said they were unsure about one or (in most cases) both.

As long as the legislative battle was framed as a choice between these competing partisan proposals, it is easy to see how each side could have sensed substantial public support for its position. The Democratic proposal, considered in isolation, was supported by a substantial 52-22 margin—and by an overwhelming 73-6 margin among Democrats (including “leaners”). On the other hand, the Republican proposal was supported by a substantial 43-25 margin—and by an overwhelming 70-11 margin among Republicans.

However, once the Senate passed a stop-gap extension and went home, House Republicans were faced with a take-it-or-leave-it choice: they could accede to the Senate’s two-month extension or be held responsible for an abrupt return to the 6.2% payroll tax rate on January 1. At that point, the public opinion that was most relevant was not opinion about the Republicans’ “freeze” proposal or the Democrats’ “millionaire tax,” but opinion about whether the payroll tax rate should be allowed to revert to its 2010 level under any circumstances.

Another question in the YouGov survey asked directly whether “the payroll tax rate should be higher or lower than the current 4.2%, or should it be kept at the same rate as it is now?” Only 11% of the survey respondents wanted a higher rate, while 51% wanted to keep the 4.2% rate, and 18% wanted an even lower rate—something Congress never seriously considered. (The remaining 20% were unsure.) With the public overwhelmingly opposed to ending the “temporary” payroll tax cut, an extension would seem to have been a political no-brainer.

Indeed, in the aftermath of the controversy, former Reagan Treasury official Bruce Bartlett wrote that “it is nearly impossible to tell exactly why [House] Republicans were so adamantly opposed to extending the tax cut. I’m still not sure.” The tactical logic of their opposition seems to have been equally confusing to the Republican rank-and-file. While 13% of Republican identifiers and “leaners” said they preferred a higher payroll tax rate, a much larger proportion (24%) said they preferred a lower rate. Among “strong” Republicans that imbalance was even greater, with only 10% favoring a higher rate and 31% favoring a lower rate.

Of course, support for cutting taxes has been a bedrock Republican principle for decades. So why did House Republicans oppose the payroll tax cut extension? There are at least four good reasons—one procedural, one political, one ideological, and one combining all of these considerations. Procedurally, it is obviously disruptive and inefficient to make tax policy in two-month increments. Politically, extending the tax cut will presumably stimulate the economy during an election year, bolstering President Obama’s chances for reelection. Ideologically, Republicans are much more enthusiastic about tax cuts for “job creators” (a.k.a., the wealthy) than they are about tax cuts for ordinary working people. (The federal Social Security tax—and, thus, the value of a Social Security tax cut—only applies to the first $110,100 of workers’ annual incomes.)

Less obviously, but perhaps most importantly, reconsidering the payroll tax cut in February provides another opening for Democrats to push their proposal to offset an extension of the reduced rate by increasing the tax burden of wealthy taxpayers. Neither the 2011 tax cut nor the two-month extension was paid for with tax or spending offsets. But the House-Senate conference committee appointed as part of that messy December compromise is charged with finding $170 billion to offset the cost of extending the lower payroll tax rate through 2012, maintaining unemployment benefits, and shielding doctors from cuts in Medicare payments. If it fails to do so, the payroll tax rate is scheduled to revert to 6.2% on March 1. In that case, given how the issue has played out so far, Republicans would probably get the blame for another frustrating instance of partisan gridlock.

But if the February negotiations focus on how to pay for extending the payroll tax cut, it seems clear from the YouGov data that the Democrats will turn out to have the upper hand. Their proposal to impose a new tax on millionaires is clearly more popular than the Republicans’ proposal for offsetting the extension with a freeze on federal pay. In the December YouGov survey it garnered more support, 52% to 43%, and more “strong” support, 36% to 26%. Comparing individuals’ responses to both proposals, 39% expressed more favorable views about the tax on millionaires, while only 27% expressed more favorable views about the freeze on federal pay.

There are two additional bits of evidence in the YouGov survey suggesting that a renewal of the payroll tax debate will work to the Republicans’ disadvantage. One comes from observing how people responded to the Democrats’ and Republicans’ proposals in turn. (The order of the questions was randomized, with half the respondents evaluating the millionaires’ tax first and half evaluating the federal workforce reduction first.) Respondents were slightly less likely to support the federal workforce reduction if they had already been asked about the proposal to tax millionaires (42% vs. 44%); conversely, those who saw the Republicans’ proposal first were more likely than those who hadn’t to support the Democrats’ proposal (55% vs. 49%). Thus, persisting in a debate framed in terms of competing means to achieve the same end is likely to compound the Republicans’ political disadvantage—unless they can come up with some different, more popular source of revenue to offset an extended payroll tax cut.

That seems unlikely, since the basic idea of increasing taxes on the wealthy is generally quite popular. Another question in the December YouGov survey gauged respondents’ views about that idea in isolation, without any reference to the controversy over extending the payroll tax cut. They favored increasing taxes on the wealthy by a 59-25 margin (with the remaining 16% unsure)—an even larger margin than for the specific proposal to offset the payroll tax cut by taxing millionaires. Moreover, an analysis relating 2012 congressional vote intentions to partisan predispositions and tax policy preferences suggests that supporting increased taxes on the wealthy pushed prospective voters toward favoring Democratic congressional candidates much more strongly than opposing increased taxes on the wealthy pushed them toward favoring Republican congressional candidates. That asymmetry in potential electoral impact will naturally loom larger the closer we get to Election Day.

And if Democrats in an election year succeed in shifting the cost of an extended payroll tax cut onto wealthy taxpayers for the rest of 2012, might they not find some way to keep it there? Some commentators—Republicans and Democrats alike—have argued that replacing payroll tax proceeds with general revenue could eventually erode public support for the Social Security system; but that argument hangs on a fastidious accounting distinction that is unlikely to stir the hearts of ordinary Americans. In any case, there is nothing sacrosanct about the current payroll tax rate, or about the current regressive cap on the amount of annual earnings subject to payroll taxes. Just as the “temporary” Bush tax cuts have proven remarkably hard to kill, even for a Democratic president and Congress, a “temporary” shift of the Social Security tax burden from working people to the wealthy could prove to have important ramifications for years to come.

Payroll Tax Extension Preferences

“Some members of Congress have proposed an extension of this year’s payroll tax cut, which has boosted most workers’ take-home pay. They want to offset the cost of continuing this tax cut by [freezing the pay of federal employees and gradually reducing the federal work force/imposing a new tax on incomes in excess of $1 million]. Do you …?”

“Others have proposed extending the payroll tax cut and offsetting the cost by [imposing a new tax on incomes in excess of $1 million/freezing the pay of federal employees and gradually reducing the federal work force]. Do you …?”

    Payroll tax cut extension offset by federal workforce reduction  
    Strongly oppose Somewhat oppose Neither/not sure Somewhat support Strongly support Total (N=1000)
Payroll tax cut extension offset by tax on millionaires Strongly oppose  1.0%  1.1%  1.0%  2.0%  10.1%   15.2%
Somewhat oppose  0.7%  1.1%  1.0%  1.6%  2.5%  6.9%
Neither; not sure  1.4%  1.1%  17.9%  3.0%  2.6%  26.0%
Somewhat support  0.8%  3.3%  4.3%  5.4%  2.6%   16.3%
Strongly support  8.7%  5.8%  7.7%  5.1%   8.2%  35.6%
  Total (N=1000)  12.6%  12.4%  31.8%  17.1%  26.0%  100%