Senate Republicans Suggest Payroll Tax Holiday

December 6, 2001

Senate Minority Leader Trent Lott has floated the idea of a one-month suspension of the payroll tax as part of an economic stimulus package now being negotiated on Capital hill. The proposal attracted interest from some Democrats, including Finance Committee chairman Max Baucus (D-MT), but both the Democratic leadership and Bush White House were more skeptical.

Under the proposal, workers and employers would not have to pay the 12.4 percent payroll tax for a period of about one month. The federal government would reimburse the Social Security system for the lost revenue—approximately $43 billion—through General Revenue transfers. The 2.9 percent Medicare payroll tax would continue unchanged.

The plan would represent a significant tax break for the nearly 80 percent of Americans who pay more in Social Security taxes than in federal income taxes. While the proposal would have no direct impact on Social Security’s financing, both sides of the debate over Social Security reform reacted cautiously, uncertain over what precedent would be set by substituting General Revenue for payroll tax receipts. Such a General Revenue transfer could show how the transition to individual accounts could be financed, or it could set the stage for a General Revenue bailout of the current system.

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