President Donald Trump’s bid to go around Congress and try to unilaterally cut payroll taxes is raising lots of questions— from, “Can he do that?” to “How would this work, anyway?”
Technically, he is only delaying the deadline for paying the workers’ share of the Social Security payroll tax. That 12.4 percent levy is split evenly between employers and employees, whose taxes are automatically withheld from their paychecks.
The delay is not that different from when the administration postponed the tax-filing deadline this year until July 15, because of the coronavirus outbreak. The money would eventually have to be repaid, though the order doesn’t say when. Trump is betting Congress won’t let that happen, and will eventually step in to forgive the tax altogether.
Here are five things to know about Trump’s executive order on payroll taxes.
Is my paycheck going to get bigger?: The break is limited to people earning less than $104,00 and whether they actually see pay increases will depend on if their employers decide to participate in the initiative (it appears to be optional). On that score, businesses will have a lot to think about.
“There’s definitely some challenges, and a lot of considerations,” said Thad Inge, senior manager of government relations at the payroll processing firm Paychex.
It could be a hassle for some to implement. The break would be for workers making less than $4,000 (pre-tax) per biweekly pay period, for example, which could be tricky for some workers. Some receive chunks of their compensation in the form of monthly or annual bonuses, for example, and it’s unclear how the administration’s plan would deal with that.
The order also presents some financial risk to employers. Trump is assuming Congress will ultimately forgive the taxes, but what if it doesn’t? Usually, businesses are responsible for paying all payroll taxes to the IRS, including their workers’ shares. What happens if, for example, a company has deferred payroll taxes for a worker who then quits in December? Who would have to pay the taxes owed? Or what would happen if Congress doesn’t forgive the taxes, and businesses must impose steep increases in tax withholding next year to pay the deferred tax bills? Could their workers afford that?
“You could foresee some nervousness with employers,” said Inge.
At the same time, businesses could face unhappy workers — and, perhaps, lawsuits — if they don’t allow their employees to take advantage of the initiative. For many, a 6 percent pay increase would certainly be useful.
Many businesses are now waiting for the Treasury Department to spell out the details of how the plan would work before deciding how to proceed.
What difference will it make to the economy?: Many are skeptical the plan will do much to lift growth between now and when voters head to the polls. It will take awhile for payroll processors to set things up, and even then, many employers probably won’t participate.
“I expect that almost no employers will use the deferral and that the policy will therefore have almost no effect,” said Alan Viard, an economist at the conservative-learning American Enterprise Institute.
It’s also possible that some businesses that participate won’t handle things quite like Trump hopes. To mitigate their risk, Inge says it’s conceivable some might decide to withhold taxes from their employees’ checks and keep them in an escrow account until it becomes clear whether Congress really will forgive the taxes owed. If lawmakers dismiss the tax bills, businesses might then pay out the deferred taxes to their workers in lump sums — defeating the purpose of getting the money into the economy before November.
And, of course, cutting payroll taxes doesn’t do a lot for those who don’t already have jobs.
If lawmakers really want to get money into lots of people’s hands quickly, and in a way they will be more likely to notice, they would be better off going back to that second round of stimulus checks lawmakers were working on before negotiations fell apart.
Payroll tax cuts are no longer verboten: It used to be that, when lawmakers were talking about cutting taxes, they were almost always talking about income tax cuts. Payroll tax cuts were usually considered off limits because of the implications for Social Security. But that has gone out the window with the coronavirus outbreak.
Though all the attention now is on Trump’s executive order, lawmakers, on a bipartisan basis, have already approved a series of payroll tax cuts worth more than $175 billion dollars for things like subsidizing family leave and to help keep workers on the rolls. That’s because so many companies are losing money they won’t pay income taxes, which means income tax cuts don’t do much for them. But they still have to pay payroll taxes on their employees’ wages, and that’s where lawmakers have been trying to make a difference.
The growing emphasis on payroll tax cuts makes Social Security advocates nervous because, even if lawmakers replace the lost revenue with other tax dollars, they fear that erodes the sense that workers have specifically paid for their Social Security benefits and are owed them in retirement.
Forgiven for whom?: Trump is gambling that Congress will end up forgiving the deferred payroll tax bills, but that raises a question: Forgiven for whom? Would it only be for people who happen to work for companies that participated in the deferral? And for workers who had opted to take advantage? That may not seem fair to people who happened to work for companies that opted against the plan, or to the self-employed — like small business owners — who were excluded from Trump’s executive order.
But if lawmakers forgive payroll taxes for everyone, regardless of their circumstances, that would be expensive — Goldman Sachs figures the tax is otherwise projected to take in $145 billion between September and the end of the year. And under the code, forgiven debts are considered tantamount to income and are therefore taxable, which means lawmakers would likely have to throw in another tax cut to turn that off as well, further increasing the cost.
This could be brilliant?: Trump’s executive order has lots of critics but if it jump-starts negotiations with Democrats over another coronavirus relief package, the president could end up proving them wrong.
Economists generally agree more needs to be done in the wake of the virus outbreak, but lawmakers are nowhere close to an agreement. If there’s one thing many agree upon, it’s that they hate Trump’s plan — one reason he issued the executive order is because Congress has repeatedly rejected his calls to suspend payroll taxes.
What’s more, Trump’s move will give him an opportunity to campaign this fall on a middle-class tax cut — something Democrats would surely like to deny him.
All of that could push lawmakers to try once more to see if they can agree to swap in their own coronavirus relief package.