President Obama has signed into law an extension through the end of the year of the payroll tax cut, unemployment benefits, and the so-called “doc fix” to prevent Medicare physician reimbursement rates from plunging.
Obama had pushed for the extension, arguing that it would provide the average taxpayer with an extra $40 in a typical two-week paycheck. The payroll tax cut was in effect last year, cutting Social Security and Medicare withholding taxes 2 percentage points, from 6.2 to 4.2 percent.
However, Congress was only able to agree last December on how to extend the tax cut for another two months, through the end of February, and the tax cut came close to expiring, along with federal unemployment benefits and the “doc fix,” until Democrats and Republicans agreed last week to pass it without fully paying for it (see Congress Passes Payroll Tax Cut and Unemployment Benefits Extension). Obama signed the bill into law on Wednesday.
“Congress did the right thing here,” Obama said at a campaign stop on Tuesday. “They listened to the voices of the American people. Each side made a few compromises. We passed some important reforms to help turn unemployment insurance into reemployment insurance, so that more people get training and the skills they need to get back in a job. We passed an initiative that will create jobs by expanding wireless broadband and ensuring that first responders have access to the latest lifesaving technologies.
"So, in the end, everyone acted in the interests of the middle class, and people who are striving to get into the middle class through hard work," he added. "And that’s how it should be. That’s what Americans expect, and that’s what Americans deserve.”
Critics have argued that the tax cut provides only a temporary stimulus effect on the economy and compromises the future integrity of the Social Security trust fund, as Social Security and Medicare have traditionally been paid for by payroll withholding taxes. Instead the tax cut will be partially paid for out of general revenues. Other offsets to the overall package of extensions to pay for the payroll tax cut, unemployment benefits and the “doc fix” include auctions of wireless spectrum, a 2.3 percent increase in pension contributions by new federal employees, and offsets that fix technical errors in prior legislation to reduce spending on health care providers and corporations.
The agreement also includes some reforms to the unemployment insurance program pushed for by Republicans, allowing states to promote the re-employment of unemployed workers through demonstration projects, and to require drug tests, but only for people who were fired for unlawful use of controlled substances. It also creates a national job search standard, covering benefits from beginning to end, and requires the unemployed to look for a job if they receive unemployment benefits, while expanding work-sharing programs to help avoid layoffs.
“Now my message to Congress is: Don’t stop here. Keep going,” said Obama. “Keep taking the action that people are calling for to keep this economy growing. This may be an election year, but the American people have no patience for gridlock and just a reflexive partisanship, and just paying attention to poll numbers and the next election instead of the next generation and what we can do to strengthen opportunity for all Americans. Americans don’t have the luxury to put off tough decisions. And neither should we. There's a lot more we can do—and there's plenty of time to do it—if we want to build an economy where every American has a chance to find a good job that pays well and supports a family.”
As part of the law, the new bill repeals the recapture provision that was part of the two-month extension of the payroll tax cut that was signed into law in December (see Payroll Tax Cut Extension Includes Recapture Provision). The recapture provision was intended to apply to those who earned more than $18,350 in January and February 2012. But the House Ways and Means Committee explained at the time that the recapture provision would be repealed once a full-year extension was approved, and the repeal was included in the new law.
For more information on the payroll tax cut extension bill, CCH has issued a tax briefing.