Workers could wait a month for payroll tax cut, if they even qualify

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Any boost for workers from a payroll tax cut that President Donald Trump favors would take weeks to kick in and the effects could be distributed unevenly.

It would take employers and the Internal Revenue Service until at least Sept. 1 to implement a payroll tax change if Congress were to include it in a stimulus bill passed in early August, said Pete Isberg, a vice president at payroll processor at Automatic Data Processing Inc.

Trump has made the payroll tax cut a priority in negotiations with Republicans and Democrats on another virus relief package as the previous round of stimulus begins running out and a still-raging pandemic squeezes the economy.

The idea is getting a cold reception from Senate Republicans who say the economic — and political — impact would be limited while soaking up a significant chunk of their $1 trillion target for the stimulus.

To cut the cost, Trump advisers and some lawmakers, including Senator Lindsey Graham, have suggested setting a maximum income threshold for application of the tax cut. But Isberg said that could create complications and unequal treatment because the payroll tax system is based on year-to-date earnings.

For example, if Congress enacts a payroll tax holiday for wages up to $50,000 through the end of the year, a worker earning $50,000 evenly throughout the year would only see the tax savings on the nearly $16,700 in wages they earn September through December.

But another individual who didn’t earn any income in the beginning of the year, but earns $50,0000 in the final quarter of the year would get the tax savings on that full amount. And someone who earned $50,000 in the first half of the year but then got laid off in July and doesn’t work for the rest of the year wouldn’t get any benefit from the cut.

“It gets complicated and you can get funny results for different people,” Isberg said. “It creates a little bit of chaos for the IRS to enforce the changes.”

The threshold does come with significant cost savings. A full payroll tax holiday for workers and employers from August to December would cost as much as $480 billion, according to an estimate from Kyle Pomerleau, an economist at the American Enterprise Institute.

After accounting for lower economic activity because of the virus’s continued spread, that figure is probably closer to $430 billion, he said. However, targeting the payroll tax holiday to those earning under $50,000 would cost considerably less — around $120 billion, he said.

Bloomberg News
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