Will the Payroll Tax Cut Fall Silently Off the Cliff?

If a tax cut is scheduled to expire, but the focus of the debate is elsewhere, will people notice? Will the average family be surprised when their taxes rise by $1,000 or more next year, even if most of the rest of the 2001-2003 tax cuts are extended for all but the wealthiest Americans? That’s precisely what could happen to a family earning $50,000 when the current law reducing payroll taxes by 2 percent expires at the end of the year. This same thing was scheduled to happen at the end of 2011, but politicians assured us then this was a bad idea. This year, they don’t appear as concerned.

According to my colleagues at the Tax Policy Center, the expiration of the payroll tax cut would increase taxes by $115 billion in 2013. This provision affects more households than any other, yet President Obama and others have been strangely silent – arguing instead about the fate of the 2001-2003 tax cuts.

As I noted last month on TaxVox, focusing only on the 2001-2003 tax cuts ignores important changes to the Child Tax Credit for very low-income families that will expire at the end of 2012. But the payroll tax cut affects nearly every worker. No doubt, the 2010 version was expensive and poorly targeted. But it had its roots in a better-designed predecessor – the Making Work Pay (MWP) tax credit– that might offer a palatable step down from current policy, without sending those who remain vulnerable over the cliff.

To refresh your memory, in 2009 and 2010, the MWP provided a credit of 6.2 percent of earnings, up to $400 for singles ($800 for married couples). MWP started to phase out once earnings reached $75,000 ($150,000 for couples), with no credit available once earnings reached $95,000 ($190,000 for couples).

But MWP was temporary and the Obama Administration made no effort to extend it. Instead, in 2010, Congress replaced MWP with a payroll tax cut that had no income limit. Ultimately, MWP dollars were better targeted towards people who were likely to spend them – and cost about half as much as the current payroll tax cut. Restoring MWP would at least reduce the number of people who will be shocked to see their first paycheck in January.

Now, all Obama has to do is find a new name for this old but useful credit. Perhaps TaxVox readers can help.  Send us your ideas. We can’t compete with Powerball but will pick a winning name on December 6.