Paying the tax piper

Tired of taking a political beating over a soon-to-expire cut in payroll taxes, House Republican leaders announced this week that they’re willing to keep the lower rate in place through the end of 2012 with no strings attached. That means the temporary tax cut, which saves the typical worker about $1,000 a year, is likely to continue for at least 10 more months with no plan for how to pay for it, now or later. Extending the tax cut makes sense, but lawmakers can’t hope to solve Washington’s long-term budget problems if they keep postponing tough decisions on taxes and the deficit.

Tax cuts for workers have long been part of President Obama’s economic stimulus agenda, starting with a tax credit of up to $400 annually in 2009 and 2010. Then in December 2010, Obama and congressional leaders agreed to replace that credit with a 12-month reduction in payroll tax rates. Obama later proposed to extend the payroll tax break for a second year, arguing that the economy couldn’t withstand a tax increase.

Since then, lawmakers have fought over how to pay for the extension, with Democrats seeking a surtax on incomes over $1 million and Republicans insisting on spending cuts. The public, though, seemed to have little patience for this debate. When House Republicans balked at a two-month extension just before Christmas, the blowback was so severe that they reversed themselves and accepted the deal. And memories of that drubbing apparently prompted their concession this week. Although they still insist that extensions in unemployment benefits and Medicare payment rates be paid for with spending cuts, they’ve dropped that demand for the payroll tax cut.

It’s appropriate to continue holding down the payroll tax, considering how high the unemployment rate remains and how wide the gap is between economic output and the country’s capacity for production. But the cost isn’t trivial: Each year the government has to borrow about $120 billion to reimburse the Social Security Trust Fund for the lost payroll taxes, which will be needed eventually to pay retirement benefits already promised to working Americans. That borrowing comes at the expense of future economic growth.

As we’ve seen with the Bush-era tax cuts, temporary tax breaks can be hard for Congress to end. That’s all the more reason for Congress to have a credible long-term plan in place for covering the cost of the tax breaks it awards. This week’s move simply means that lawmakers face even tougher decisions in December, when the Bush-era tax cuts, the payroll tax reduction and a host of other temporary measures come up for renewal. At some point, lawmakers have to decide when to start filling the hole they’re digging.