The contentious payroll-tax-cut extension appears to be headed for passage after legislators reached a compromise in Conference Committee negotiations. It appears that Congress can indeed work together and reach consensus.
In Conference Committee, leaders from the House of Representatives and the Senate negotiate differences in the versions of a proposed law passed in each chamber of Congress. Sometimes this negotiation is just a formality, the resolution of technical issues. Or, it's extremely contentious, as was the case with this piece of legislation.
What was all of the fighting over?
The main disagreement was the insistence by some members of the House that the payroll tax cut be financed with spending cuts elsewhere. To any business owner this would appear to be a sound idea—don’t spend money unless you have a source of funds.
But the inability to agree to this provision held up the passage of the overall bill.
The delay was an opportunity for political posturing. Democrats accused Republicans of being against a “middle class tax cut.” Republicans accused Democrats of being “financially irresponsible.”
The House member who wanted offsetting spending cuts eventually caved. That eliminated the need to find $100 billion in cuts elsewhere and the Conference Committee managed to agree.
Before they reached this deal, the employee portion of the social security tax contribution would have returned to 6.2 percent of wages, up to the annual wage limit ($110,100 for 2012). This compromise maintains the employee portion at a reduced rate of 4.2 percent but does not impact the employer contribution, which remains at 6.2 percent.
The Medicare tax—the other payroll tax—remains unchanged at 1.45 percent of wages with no wage limit.
Is it worth it?
Any tax cut is welcome news. But the impact that this will have on the overall economy could be rather small. For someone earning $100,000 in wages, the tax cut provides an extra $42 per week. Given current trends in consumer financial behavior, it's likely that this additional money will go toward paying down existing debt rather than spending.
As a result, the economic stimulus from this tax cut won’t necessarily lead to the purchase of new washing machines, cars, furniture or vacations.
Will small businesses lose more than they gain?
As part of the compromise, there are some losers. At the end of 2011, 77 tax deductions and credits expired. A provision to extend many of these expiring tax credits was removed from the proposed legislation. Here are a few of the lost tax credits that impact small businesses.
- Research and development
- Out-of-pocket expenses (for some sectors)
- Purchase of energy-efficient appliances
- Purchase of business equipment
The agreed-to legislation isn’t out of the woods yet. Legislators must draft the text of the compromise agreement and get the President’s signature, which makes it law. The goal is to make this happen within a few days, but given the limited time until the Congressional recess, it’s more likely it will happen after it's back in session.
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