White House Has Not Ruled Out Raising Cap on Payroll Tax

Although President Bush has repeatedly said he is against raising payroll taxes as a part of Social Security reform, there is confusion about the meaning of his statements: Is he only ruling out increasing the rate of the Social Security payroll tax or is he also ruling out increasing the level of income on which this tax applies? Currently, the tax (6.2% paid by the employee and 6.2% paid by the employer) is not levied against income over $90,000 per year. Sen. Lindsey Graham (R.-S.C.), however, has suggested that this $90,000 cap be lifted, possibly combined with a reduction of the overall payroll-tax rate, as a means of attracting Democrats to support a Social Security reform that includes personal retirement accounts. National Journal‘s Congress Daily reported last week that Graham is considering proposing legislation “lowering the payroll tax from 12.4% to 11.2%, while raising the $90,000 cap on earnings subject to the payroll tax.” In effect, this would be a massive marginal tax increase for many self-employed people and small business owners and for virtually all middle-income families who earn more than the current cap. These, of course, are all core constituencies of the Republican Party. In his State of the Union address, Bush said, “We must not jeopardize our economic strength by increasing payroll taxes.” But on February 9, USA Today ran a front-page story about its latest poll, indicating that two-thirds of those surveyed favored subjecting “all wages to payroll taxes.” In the same story the paper reported that the President “hasn’t made it clear whether [his opposition to a payroll tax increase] also includes boosting the cap on wages that are taxed.” “We don’t want to raise taxes as a solution,” White House spokesman Trent Duffy told USA Today when asked about the issue. “But on specifics, we don’t want to negotiate with ourselves.” That same day, I asked White House Press Secretary Scott McClellan whether the President’s statements about not increasing payroll taxes “also mean that he’s ruled out raising the level of income to which the tax applies?” “We’ve also, actually addressed that issue, too,” McClellan said. “I think I’ve–I know I’ve addressed it, and others in the administration have addressed it, and I think he’s addressed it previously as well.” “And the answers is?” I asked. The President’s spokesman then said that Mr. Bush has “laid out very clear principles that should guide us as we move forward to strengthening Social Security. He believes we ought to move forward in a bipartisan way–” At this point McClellan was interrupted by several reporters in the White House briefing room who expressed irritation at his failure to clearly address the question of whether the President was ruling out raising the level of income that would be subject to the payroll tax. McClellan finally said, “[T]he President made it very clear that we’re not going to get into the business of ruling things in or out, that he welcomes all ideas.” “One of his principles is we should not increase payroll taxes,” said McClellan. Turning to the specific issue of raising the income level, the top White House spokesman then told me: “. . .the issue that you’re bringing up doesn’t solve the problem. It doesn’t address the solvency issue. It only pushes the date [of when the Social Security system is expected to go bankrupt] out a few years. So it doesn’t address the overall issue of making it permanently sound. It only delays it.” “So he’s not ruling out raising the level?” I asked again. On this third try, McClellan said: “…But he’s made it clear that there are going to be a lot of ideas expressed. There are a lot of ideas already out there and different pieces of legislation. And we want to work together with members to advance a solution. And so that’s why we’re not going to get into the business of ruling things in or out, but he’s made clear what his principles are, and he’s made clear that he’s open to all ideas with the exception of increasing payroll taxes.” But he apparently has not ruled out raising the level of income to which payroll taxes apply.