Explaining the Democrats’ Payroll Tax Holiday

It'll probably create more votes than it will jobs, but it's a start.

By Seth Freed Wessler Sep 27, 2010

Senate Democrats will to take a largely political swing at high unemployment this week, with a bill to provide incentives to stop outsourcing. The bill would suspend payroll taxes for companies that replace outsourced jobs with domestic hires and end tax incentives for companies to hire abroad. And it will give Democrats another talking point in their effort to show voters they care about jobs. But it’s one more initiative that’s too timid and too piecemeal to actually get folks back to work.

With unemployment at nearly 10 percent for all Americans and significantly higher for both blacks and Latinos, the Creating American Jobs and End Offshoring Act, introduced last week by Sen. Dick Durbin of Illinois, is an 11th hour attempt to address unemployment in the remaining weeks of this pre-election session. The bill has already come under attack from conservatives who say it will hurt businesses and slow growth and some progressives who doubt it’s enough.

What’s in the Bill

Durbin’s initiative would provide a two-year payroll tax holiday for companies that hire workers in the U.S. if the job would otherwise have been outsourced. The tax holiday would go into effect immediately and remain available for three years.

Payroll taxes, which include payments for Social Security and Medicare, are a significant financial weight for both employers and employees. The legislation would suspend the employer’s contribution to the payroll taxes for certain jobs. It would not, however, change the tax obligations of new hires, despite the fact that payroll taxes are generally considered to be some of the most regressive taxes around.

The bill’s drafters hope that by suspending employers’ payroll tax obligations, American companies will be more likely to hire U.S.-based workers.

In addition to the tax holiday, the bill closes loopholes and tax arrangements that actually provide incentives for companies to relocate jobs to other countries.

The Huffington Post has excerpts from the bill’s summary:

eliminates subsidies that U.S. taxpayers provide to firms that move facilities offshore. The bill prohibits a firm from taking any deduction, loss or credit for amounts paid in connection with reducing or ending the operation of a trade or business in the U.S. and starting or expanding a similar trade or business overseas. 


Under current law, U.S. companies can defer paying U.S. tax on income earned by their foreign subsidiaries until that income is brought back to the United States. This is known as "deferral." Deferral has the effect of putting these firms at a competitive advantage over U.S. firms that hire U.S. workers to make products in the United States. The bill repeals deferral for companies that reduce or close a trade or business in the U.S. and start or expand a similar business overseas for the purpose of importing their products for sale in the United States. U.S. companies that locate facilities abroad in order to sell their products overseas are unaffected by this proposal.

Conservative business groups like the Chamber of Commerce and the National Association of Manufacturers oppose the bill.

"Limiting deferral would hinder the global competitiveness of these American companies, impede U.S. economic growth, and ultimately result in the loss of jobs," Bruce Josten, a Chamber of Commerce VP, wrote in a letter to senators last week, reports CNN.

Not surprisingly, conservative Democrats have raised concerns about the bill as well. The Wall Street Journal reports:

Sen. Max Baucus, the Montana Democrat who chairs the Senate Finance Committee, expressed concern last week that the bill would damage the competitiveness of U.S. companies, said Congress Daily, a Capitol Hill publication. "I think it puts the United States at a competitive disadvantage," Mr. Baucus said. "That’s why I’m concerned."

The bill’s supporters say the legislation will help stimulate American jobs in the short term and could help shift manufacturing and other offshore jobs back to the United States for an extended period. At the very least, the bill removes a set of incentives that, especially in a period of high unemployment, are hard to justify. And for Democrats, a vote on the bill, which is scheduled for tomorrow, provides a needed platform to highlight the party’s committment to economic recovery.

The Impact? Not Much

But it’s unclear how much of a dent the Creating American Jobs and End Offshoring Act could actually make. Though it’s sure to create some jobs in the U.S., those will likely be a drop in the bucket relative to the more than 14 million U.S. workers who are unemployed and the millions more underemployed.

Moreover, while it may help create some jobs, the tax holiday is skewed to the right in that it suspends employer contributions but not those of employees. As Dan Froomkin writes for the Huffington Post, "On its own, [the payroll tax is] the most regressive tax imaginable: 12.4% of your salary (typically split between you and your employer) no matter how little you make, and capped at an annual salary of $106,800."

Suspending the employee tax, or building a more progressive tax structure overall, would help equalize the economy and stimulate it in the short term by giving lower income workers money to inject into the economy. As a matter of politics, the bill could help the embattled party stave off a massive congressional shift in the coming elections. But as a matter of policy, Democrats are once again offering up too little too late to stimulate the economy.