Congress Approves Two-Month Payroll Tax Holiday and Other Extensions

Congress fittingly capped a tumultuous 2011 by snuffing out yet another fiscal showdown while managing to kick the can of tougher decisions down the road. Both the Senate and House this morning approved, by unanimous consent, of a two-month extension of the payroll tax holiday and other various extenders. The most promising aspect of the whole ordeal is that the cost of the package was fully paid for (unlike last December’s tax deal).

This deal extends the payroll tax holiday, extended unemployment benefits, the ‘doc fix’ and a few other health provisions for two months and is fully offset by an increase in guarantee fees to Fannie Mae and Freddie Mac.

Policy Cost
Payroll Tax Holiday $20 Billion
Unemployment Compensation Extension $9 Billion
SGR and Other Health Extensions $4 Billion
Increasing Fannie Mae and Freddie Mac Fees -$36 Billion
Total -$3 Billion

Note: Numbers are rounded

The payroll tax holiday is a continuation of the 2011 two percent reduction in employee payroll taxes, which is used to finance Social Security. As with the previous holiday, funds from the general fund are being transferred to the Social Security system to compensate for the lost revenue. The bill also continues expanded unemployment benefits, prevents a 27% cut in Medicare physician payments, and enacts some other smaller extensions.

Finally, the offset is accomplished by increasing the fees Fannie Mae and Freddie Mac charge lenders for guaranteeing home loans, as well as the annual premium that the Federal Housing Administration charges homeowners for insuring mortgages. This provision expires after ten years -- meaning that while it does offset its own costs over ten years, it will not reduce the deficit in hte out years.

This bill by no means solves the extender problem since this is only a two month extension, and it does not address all of the extenders, notably the Alternative Minimum Tax (AMT) patch and various other tax extensions. A conference committee will attempt to hash out a longer term extension package. Conferees will include Reps. Kevin Brady (R-TX), Dave Camp (R-MI), Renee Ellmers (R-NC), Nan Hayworth (R-NY), Tom Price (R-GA), Tom Reed (R-NY), Fred Upton (R-MI), Greg Walden (R-OR), Sander Levin (D-MI), Xavier Becerra (D-CA), Chris Van Hollen (D-MD), Allyson Schwartz (D-PA) and Henry Waxman (D-CA), as well as Sens. Max Baucus (D-MT), Ben Cardin (D-MD), Jack Reed (D-RI), and Bob Casey (D-PA). Senate Republicans have not yet named their delegates.

The group will face the tough task of identifying offsets for longer-term extensions, though it is encouraging that both sides have committed to offsetting the costs. Senate Majority Leader Harry Reid (D-NV) said today in a news conference just after the Senate approved of the two-month extension that everything should be on the table in finding offsets. Conference committee members, and all lawmakers, would be well-served to heed CRFB’s recent paper, which called for a fiscally responsible approach to dealing with the expiring provisions.

The fact that this measure is offset sets a positive precedent – one which we hope continues into 2012.