Senate Payroll Holiday Bill Is a Logistical Disaster

December 21, 2011 J

While most of the reporting has focused on the political implications of the Hosue rejecting the Senate’s two-month payroll tax holiday, the far more important question is whether the Senate bill is sound public policy. It is not. Not only did the most past a vastly superior version that extended the holiday for a full year and addressed numerous other economic issues, but the Senate version is fatally flawed in its implementation of a two-month holiday.

To be clear, the bill does not cleanly extend the current Social Security employee share of 4.2 percent for two months. Instead, it creates a two-tiered payroll tax with a rate of 4.2 percent for the first $18,350 of income in those 60 days, with a 6.2 percent rate above that. For the first time, we would have a graduated, progressive system of tiered rates for payroll taxes.

This establishment — for the first time — of multiple rates of payroll tax presents serious logistical challenges for payroll processors. In fact, the National Payroll Reporting Consortium is strongly opposed to the Senate bill based on this feature, writing:

The difficulty is in establishing a new Social Security Taxable Wage limit of $18,350 for the two-month extension period. More than ten percent of the workforce1 is likely to meet that limit, and would be subject to the higher 6.2% tax rate for earnings over that amount. However, many payroll systems are not likely to be able to make such a substantial programming change before January or even February. The systems affected tend to be highly complex, normally requiring at least ninety days for a change of this magnitude for software testing alone; not to mention analysis, design, coding and implementation.

It appears that, remarkably, 89 senators voted to pass this legislation without bothering to consult with payroll processors on whether it could actually be implemented. Moreover, a mad dash to implement this untested, unprecedented change would have unpredictable consequences and costs that it simply makes no sense to impose on businesses.

In light of the logistical disaster the Senate bill would cause, Speaker Boehner and House Republicans are clearing doing the right thing rejecting this bill and insisting on an extension that doesn’t present such severe logistical problems.

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