Newsday (New York, NY)

November 18, 2001 Sunday ALL EDITIONS

SECTION: MONEY & CAREERS, Pg. F02

ECONOMY WATCH; Percolating Idea for a Payroll Tax Cut

By James Toedtman; CHIEF ECONOMIC CORRESPONDENT

Washington

THIS IS A STORY about a very good idea that probably won't go anywhere. Since Congress started discussing ways to revive the national economy more than two months ago, the nation's factories have continued their deepest decline in 70 years, unemployment has continued to climb, and the rest of the world has followed the United States into an economic ditch.

Still, Congress has dithered - because of its focus on the war or the endless quest for political advantage.

From Capitol Hill to the White House, there is agreement that devising a plan of tax cuts and spending to spark the economy shouldn't be this hard. But Democrats and Republicans have managed to misplay this opportunity. From rebates to loopholes, the competing plans approved by the House and deadlocked in the Senate are derided alternately by Democrats and Republicans as too complicated, too slow, too inefficient or too skewed to special interests.

But a germ of an idea has begun percolating. Finally.

Sen. Pete Domenici (R-N.M.) calls it a payroll tax holiday: Cut payroll taxes in half for one month. For both employees and employers, the percentage of wages withheld for Social Security and Medicare would be cut in half - from 6.2 to 3.1 percent - producing between $200 and $400 per taxpayer. That provides a $40 billion spark without any complicated calculations, new laws or check-writing.

It's simple, quick, efficient and it divides the benefit between business and consumer. But it's fate rests with the simple truth that there's nothing besides good sense and a respected senator pushing the plan forward.

It has three problems: First, it doesn't have the active support of heavy campaign contributors. For example, business has launched a vigorous campaign to repeal the corporate alternate minimum tax for 15 years. In the past decade, 16 companies have contributed $45.7 million to political candidates, twothirds of them Republicans. House Republicans responded last month not only by passing a bill that would repeal the minimum tax but also give companies credit for loopholes they couldn't exploit in the past.

Those 16 companies, including IBM, GE and the Big Three automakers, would get a $7.4 billion payback. High-tech companies anxious to accelerate depreciation schedules, and organized labor anxious to increase unemployment benefits, have also been pushing those key parts of the emerging economic stimulus packages.

But the payroll tax holiday has none of that forward push. In fact, it collides with two powerful forces: Conservative Republicans' tax-cutting fervor and Democratic hopes for reclaiming control of Congress.

To accommodate the payroll tax holiday, Domenici would drop both the $300 rebate for poor taxpayers (which Democrats like) and the accelerated effective date marginal tax rate cuts from 2006 until next year (which Republicans like).

The third political hot button is Social Security. The holiday would reduce the Social Security trust fund by $40 billion, and no politician - Republican or Democrat - wants to tamper with the fund. Republicans are particularly worried with their perceived indifference to Social Security. It plays into what Democratic campaign strategist James Carville calls Democrats' "moment of opportunity." THE NUMBER Payroll Taxes

How Social Security and other payroll tax revenues have grown (in billions) 1940 $0.7 1950 2.6 1960

11.2 1970 39.1 1980 138.7 1990 353.9 2000 620.5 Source:Social Security Administration

TUFF Note: Charts do not capture from my limited resources. Anyone who wants to see the dramatic increase in payroll taxes can visit "Important Numbers" to see the SS Trust Fund.