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Super committee failure threatens key tax breaks

Super committee deal would have made it easier for Congress to extend temporary tax breaks that are buoying the economy. The likely debacle of the super committee could trim growth by ending those tax breaks.

By Kevin Drawbaugh and Patrick Temple-WestReuters / November 21, 2011

Super committee co-chair Sen. Patty Murray (D) of Washington (right) and committee member Sen. John Kerry (D) of Massachusetts arrive for a meeting in the Capitol in Washington Nov. 18, 2011. Without a deal to find at least $1.2 trillion in budget savings over 10 years, Congress may find it more difficult to come together on other tax breaks that have helped support the economy.

Kevin Lamarque/Reuters

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WASHINGTON

Whatever happens to the U.S. Congress' deficit-fighting ``super committee,'' world markets are increasingly concerned about several temporary tax breaks vital to the economy that are set to expire at year-end.

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One is the Obama administration's payroll tax cut. Another is a ``patch'' to prevent the alternative minimum tax (AMT) from hitting middle-class taxpayers. Still others include deductions for state and local sales tax and for college tuition.

Corporations are anxious about business credits expiring on Dec. 31, such as one for research and development. In addition, unemployment insurance is a top worry in a sluggish economy that some say could easily tip back into recession.

Here is a brief look at key items and what might happen:

PAYROLL TAX CUT

Payroll taxes - which fund the Social Security retirement system - were cut to 4.2 percent for employees at the start of 2011. The rate is due to revert to 6.2 percent at the beginning of 2012 if Congress takes no action.

President Barack Obama's September jobs package would extend and expand the cut, dropping the rate for employees further to 3.1 percent for 2012.

The rate for employers, which has remained at 6.2 percent this year, would fall to 3.1 percent on the first $5 million in payroll, under the president's plan, which would also exempt businesses from payroll taxes if they increase their payrolls.

The president's payroll tax extension would cost $245 billion in forgone government revenues.

RBC Capital Markets estimated that allowing the payroll tax cut to expire at year-end would reduce U.S. gross domestic product growth by 1 percentage point in 2012.

This issue, like others below, could be included in whatever deal comes out of the super committee, though that seems unlikely given the panel's rapidly dimming outlook.

The payroll tax question also could be dealt with later as part of a catch-all, end-of-year spending bill.

``Failure by Congress to extend the temporary payroll tax cut enacted last December would reduce paychecks starting on Jan. 1, withdrawing needed support from the still-weak economy,'' said a recent report from the Center on Budget and Policy Priorities, a Washington think tank.

The tax cut is worth $934 a year to the average worker, the center estimated.