Just weeks before the House of Representatives flipped to Republican control, Congress in 2010 approved a one-time reduction of 2 percentage points in the Social Security payroll tax for employees. That measure, part of a package that also extended the Bush-era tax cuts, aimed to help revive the economy. It cut the employee payroll tax from 6.2 percent of taxable earnings to 4.2 percent for 2011. A 6.2 percent employer tax remained the same.
Because the payroll tax is the funding stream for Social Security, Congress said the payroll tax “holiday” to employees should be for 2011 only. But with the economy still struggling – and the 2012 elections looming – President Obama proposed extending and expanding the tax break for another year. Democrats largely back the plan, despite concerns by some that it would weaken Social Security. With the public in favor of extending the cuts, GOP leaders see it as a political necessity, but many conservative fiscal hawks still need convincing.
Democrats and Republicans are at odds over how to pay for it: Republicans propose offsetting the costs with spending cuts, while Democrats favor a surtax on personal incomes over $1 million. The cost to extend the payroll tax break for employees at current levels is $119.6 billion. If Congress does nothing, the average family will pay about $1,000 more in taxes next year, beginning in January.