Fannie, Freddie Fee Hikes in New Payroll Tax Proposal

Arnmoderate Pennsylvania senator has offered legislation to end the impasse overrncontinuing payroll tax cuts that have been in place since the first of thisrnyear.   Democrat Bob Casey, Chairman of the JointrnEconomic Committee, offered a compromise to Democratic and Republican legislation,rneach of which has been rebuffed in Senate votes over the last few days.  Among other changes, Casey’s legislationrnresurrects a fee for Fannie Mae and Freddie Mac mortgage guarantees that wasrndefeated in another context last month.</p

Background</p

Payrollrndeductions for FICA or Social Security are slated to return to 6.2 percent ofrnsalaries and wages on January 1 unless Congress votes to extend them.  FICA withholding was reduced by 2 percent forrnone year under the Tax Relief, Unemployment Insurance Reauthorization and JobrnCreation Act of 2010.  The payroll tax reductionrnalong with extending unemployment insurance for long-term unemployed was thernDemocratic side of a deal that gave Republicans a continuation of the Bush era incomerntax cuts.</p

Thernreduction in withholding affects the first $106,800 in earned income.  Unearned income (capital gains, royalties,rnrents) as well as annual salaries and wages over $106,800 are not subject to FICArntax.  Expiration of the cuts is expected torncost the average employee $1,000 and those at the top of the wage scale willrnpay an additional $2,236 per year.</p

Itrnshould be mentioned that, while the cuts are to the FICA tax, it is merely arnmechanism for transmitting the funds directly to individuals.  The Social Security Trust Fund is reimbursed fromrnthe General Fund.</p

Current Proposals</p

Therernhas been little disagreement on Capitol Hill on the value of extending the taxrnreductions to stimulate the economy, but much dissention over both the size ofrnthe cut and ways to pay for it.  Underrnthe original Democratic proposal the cut would be expanded from 2 percent torn3.5 percent for 2012 and, after input from Republicans, it was expanded torninclude a reduction in the portion of the tax paid by employers.  The program would be paid for by a 3.5 percentrnsurtax on persons earning more than $1 million per year.  The Republicans countered with a proposalrneliminating the surcharge, keeping the payroll tax at the current 4.1 percentrnlevel and paying for the bill by cutting extending the current two year federalrnwage freeze for another year, eliminating 10 percent of all federal jobs, andrninstituting means tests for Medicare, unemployment compensation, and foodrnstamps.  </p

Details of Casey Proposal</p

Caseyrnsaid that his compromise “attempts to bring Republicans aboard on the tax cutrnextension by trimming the cost of the package by roughly one-third and usingrnbipartisan ideas to pay for it.  Hisrnlegislation retains the 3.1 reduction in employee deductions for SocialrnSecurity but eliminates the proposal to reduce the employer’s portion of thernFICA tax.  This will cut the cost of thernpackage from $265 billion to $185 billion. rnThe larger reduction in the employee share is estimated to save thernaverage employee an additional $500 above the 2011 cuts.</p

Casey’srnoffice says his proposal “adopts bipartisan deficit-reducing proposals from thernSuper Committee negations” to pay for the bill.  These include:</p<ul class="unIndentedList"<liIncreasing thernfees that Fannie Mae and Freddie Mac charge mortgage lenders to guaranteernrepayment of new mortgage loans. Thernfinal amount will be determined by the Director of the Enterprises (sic) but shallrnnot be less than an average increase of 12.5 basis points for each originationrnyear or book year above the average fee imposed in 2011 for a guarantee. This is expected to raise $38.1 billion. (A similar fee was eliminated at the lastrnminute from H.R. 2112 which raised loan limits on FHA and VA loans which becamernlaw on November 18.)</li<liKeeps the surtaxrnon high wage earners but reduces it from 3.25 percent to 1.9 percent, appliesrnit to income over $3 million, and makes limits it to 10 years beginning in 2013. </li<liIncludes a proposalrnmade by Senate Minority Leader Mitch McConnell that would make millionairesrnineligible for unemployment compensation and food stamps.</li<liContinues tornensure the stability of Social Security through reimbursements from the GeneralrnFund.</li</ul

Caseyrnsaid of his proposal, “As the clock continues to tick down, it is imperativernthat we come together now on a middle income tax cut.  The legislation is fully paid for and includesrnmeasures that have received bipartisan support in the past. It is time to actrnto help working families in Pennsylvania and across the country get back onrntheir feet and jump start the economy. We can no longer afford to jeopardizernworking families in order to protect the wealthiest few.”

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