Texas Gov. Rick Perry, a candidate for the Republican nomination for president, has suggested making Congress a part-time legislature. Whatever you think of the idea, Senate Majority Leader Harry Reid of Nevada has already given us something approximating it by sending his members home without a proper payroll tax deal written into law. By passing an unworkable two-month deal as a “take-it-or-leave-it” proposition, then heading home, Reid has acted very much in the tradition of Obamacare, the massive and hastily assembled health care law whose drafting errors will haunt Americans until it is finally repealed. In 2011, American workers enjoyed a 2 percent reduction in their payroll taxes under a deal struck between Congress and President Obama. Congress is trying to extend this lower rate, but the Senate and Obama are insisting on a two-month rather than a 12-month deal. In principle, making the extension effective for a full year is better tax policy because it creates more certainty.
But there are also practical considerations — namely, that this two-month deal simply won’t work. The National Payroll Reporting Consortium (NPRC), a non-profit trade group that represents payroll processors, has informed Congress that this change is much more complicated for businesses to implement than it is for Congress to pass. It isn’t simply a matter of chopping off a few percentage points from each employee’s withholding on pay day.
Senate Democrats also inserted a provision into their bill that essentially turns the payroll tax into a graduated income tax, but only for two months. Right now, Americans must pay Social Security taxes on their first $110,100 of earned income each year. But the Senate bill, which the House rejected Monday night, would create a new two-month “year” in which there are two brackets for Social Security taxes — one with the current rate, and one with a higher rate for income earned in those 60 days above $18,350. The idea is to prevent the rich from paying less tax than others (in the event that rates rise in March), but the provision threatens to make life hell for small businesses as they calculate what they owe.
In a letter to congressional leaders, NPRC president Pete Isberg wrote that such a change cannot be accomplished in the few days that remain of 2011 — in many cases, he wrote, it could take until February to guarantee the accuracy of the resulting payroll tax deductions. Isberg wrote that the IRS might even have to add extra lines to Form W-2, and that many companies will be left guessing how to change their payroll systems until the IRS issues guidelines.
The confusion will only be heightened by most businesses’ need to file quarterly. A two-month deal (as opposed to a three- or six- month deal) is therefore even more complex. House Republicans should stand firm in demanding a deal that extends the payroll tax cut by a full year, without any gimmicky new tax rates. Small businesses deserve at least that much.
