How Much Would Suspending the Payroll Tax Cost?

Mar 11, 2020 | Taxes

Policymakers are discussing several economic stimulus ideas in response to the coronavirus outbreak, including reports that yesterday President Trump proposed suspending the payroll tax through the November election or the end of the year. Some press stories were also reporting shorter periods of time, such as 90 days. Such a holiday could cost up to $840 billion, per our rough estimates.

We had previously estimated the costs for reducing the Social Security payroll tax rate – between $55 billion and $75 billion per point reduction per year depending on whether the cut is for the employee or employer.

Here, we update our estimates to include completely suspending payroll taxes (including Medicare taxes) and doing only a partial year suspension. Social Security payroll tax revenues are not collected evenly over the year; less is collected in the later months of the year because high-income workers do not owe tax after they have earned above the Social Security taxable maximum ($137,700 in 2020).  

To suspend the payroll tax for a full year would cost roughly $1.1 trillion, which is lower than the $1.3 trillion in annual payroll tax revenue because a payroll tax cut on the employer side generally translates to higher wages for employees (and therefore higher income taxes).

By our estimates, suspending payroll taxes for three months would cost $300 billion, suspending them through the end of October would cost $660 billion, and suspending them for the rest of the year would cost $840 billion.

Proposal (cost in billions) 3 Months
Until the Election
The Rest of 2020
Suspend all payroll taxes – Social Security and Medicare $300 $660 $840
Suspend Social Security taxes $240 $515 $650
  Suspend employer-side Social Security taxes $100 $215 $275
  Suspend employee-side Social Security taxes $130 $280 $350
Suspend Medicare taxes $65 $145 $190
  Suspend Medicare employer-side tax $25 $60 $75
  Suspend Medicare employee-side tax including high-income surtax $35 $85 $110

Source: CRFB estimates based on Congressional Budget Office, Department of Treasury data.

These are rough estimates. We make a simplifying assumption that the cut in the employer-side payroll tax is passed along to workers, either in the form of higher wages or an averted wage cut, which results in a corresponding increase in individual income taxes. If that assumption does not hold and companies do not pass along tax savings to workers, there would be a different revenue increase from decreased business expenses (and increased profits), but we did not include that effect in our quick estimates here.

If lawmakers did implement a payroll tax holiday, they would need to decide if the revenues lost from the Social Security and Medicare trust funds would be offset with a general revenue transfer (as they were in 2011 and 2012).

In a statement yesterday, Committee for a Responsible Federal Budget president Maya MacGuineas called for any stimulus to be targeted to help the economy and citizens, and offset over a reasonable period of time after the economy has recovered:

We’re potentially on the verge of an economic emergency, and the federal government should work to keep our economy strong and our citizens safe. If lawmakers put together a fiscal stimulus package, it should focus on policies that would help the current situation – public health measures, support targeted to those families and businesses most impacted by the disruptions and slowdown, and policies that would generate a broad boost in overall economic activity. Policymakers should not use this an excuse to implement expensive pet projects.

Short-term borrowing is appropriate for economic stimulus. However, given our historically high debt levels, we should also plan on offsetting the costs over a reasonable period of time once the economy has recovered. Last summer, the Committee released a Break the Glass Plan that featured a robust stimulus plan and two paths to offset that plan over the long run. Our Budget Offset Bank also includes numerous options to reduce health care costs, raise new revenue, fund infrastructure, or otherwise pay for the costs of new spending or tax relief.