Proposed Employee Payroll Tax Holiday Would Provide Big Boost to NC’s Struggling Economy

The employee-side payroll tax holiday proposed by President Obama could be just what North Carolina’s ailing economy needs.

The President’s proposed American Jobs Act would cut the employee side of the payroll tax in half – from 6.2 percent to 3.1 percent – in the year 2012.  A payroll tax holiday of this size would add an estimated $4.8 billion to the buying power of working North Carolinians, more than the combined wage and salary gains of all North Carolinians from 2009 to 2010.

The Great Recession hit North Carolina families harder and longer than any economic downturn since the Great Depression.  The collapse of the nationwide housing bubble and the resulting loss of wealth and depressed consumer spending has put hundreds of thousands of North Carolinians out of work and left North Carolina businesses with too few customers.

The 2009 Recovery Act, while successful in preventing the economy from descending into a downward spiral, was too small and ran out of steam too soon to put the economy back on an upward trajectory.  The key to kick-starting an economy that’s currently stuck in neutral is to restore the buying power and confidence of American consumers, thereby ensuring businesses that they will continue to have a growing market for their goods and services.

The proposed payroll tax holiday in the American Jobs Act is both large enough and well-targeted enough to provide just such a boost to the economy.  Although less well targeted to low- and middle-income families compared to the 2009 Making Work Pay credit, cutting the employee-side of the payroll tax in half provide a substantial increase in workers’ paychecks in 2012.  The payroll tax holiday would provide a $1,606 increase in the income of an electrician earning $51,810 per year.  A home health aide earning $21,760 per year would gain an extra $675.

Mark Zandi, former economic advisor to Sen. John McCain and chief economist at Moody’s Economy.com, estimates that the employee payroll tax holiday would create an estimated 750,000 jobs nationwide.  Based on North Carolina’s share of national employment, this could translate into 23,000 or more jobs in the state.

With low consumer and business confidence falling back almost to the record-low levels seen during the low point of the recession, providing working- and middle-class families with a significant income boost through a payroll tax holiday will go a long way toward steering the economy away from a possible double-dip recession and toward a sustainable economic recovery for North Carolinians.

3 Comments

  1. Jimmy

    September 23, 2011 at 9:00 am

    Aren’t we just stealing this money from Social Security funds ?

  2. Ed McLenaghan

    September 23, 2011 at 10:55 am

    Good question. Actually, the payroll tax holiday is “made whole” by a transfer from the federal General Fund. Thus, over the long term, the payroll tax holiday will be paid for by interest payments on federal treasuries from general federal revenues.

    Here’s the US Treasury release on how it works: http://www.treasury.gov/press-center/press-releases/Pages/tg1029.aspx

    Dean Baker has a good column on why the payroll tax holiday should be decoupled from Social Security taxes to ensure that political pressures don’t lead to a permanent extension of the payroll tax holiday: http://www.cepr.net/index.php/op-eds-&-columns/op-eds-&-columns/the-social-security-tax-cut-and-the-ignorance-of-political-experts

  3. David Engage America

    September 23, 2011 at 4:59 pm

    While a payroll tax cut sounds great it will most likely not accomplish its goal of creating jobs and spurring demand because it is designed to be a short-term tax break instead of a comprehensive solution to our jobs problem

    Studies of the last payroll tax cut have shown that the short-term nature of the tax break led workers to save their extra money not spend it. http://eng.am/qsFK2y.

    The same theory applies to employers. Since the tax cut only lasts until 2013 if any jobs are created it is most likely because they would have been created without the tax cut. That means that if employers hire someone they will likely pocket the payroll savings which defeats the purpose of giving them a tax credit to create jobs.

    America needs a long-term approach to creating jobs. Creating ad-hoc tax cuts just complicates the matter.