President Donald Trump’s weekend blitz of executive actions included a promise of tax relief for workers, but policy experts say the White House has left several critical questions unanswered, including who will be responsible for collecting the deferred tax and how and when it will need to be paid off in the event that it is not made permanent, which Trump cannot do without congressional approval.
Most economists — along with lawmakers on both sides of the aisle — have been lukewarm about a payroll tax cut, pointing to its relatively limited effectiveness, since it doesn’t help people who are unemployed, retired or otherwise out of the workforce. But the Trump administration has steadily pushed for one since the early days of the pandemic.
“Payroll tax holidays have a mixed economic record,” the Tax Foundation noted in March, when the Trump administration first floated a temporary deferral in collecting the taxes that fund the Social Security and Medicare programs.
At first glance, the executive order might seem similar to a provision in 2011 and 2012 that reduced workers’ portion of the payroll tax by two percentage points. But that earlier tax cut was legislated by Congress rather than coming out of the White House, and the monetary difference was made up by a transfer from the Treasury’s general fund to the Social Security Trust Fund — a move that only Congress can authorize, despite Trump's assurance of forgiveness.
It is far from clear to what extent corporate America will sign on to the plan sketched out in the executive order. Walmart, Target, McDonald’s, CVS, UnitedHealthcare and Apple all did not respond to requests for comment about if or how they would implement a payroll tax deferral.
The order is certain to face legal challenges, both from Democratic lawmakers who oppose Trump’s strategy of attempting to bypass Congress, as well as from states, which the order would compel to cover some of the funding shortfall, even though their own budgets have been burdened with public health costs and a steep slide in tax revenues.
Companies fear being caught in the middle. “There's a lot of unresolved questions about the implementation of this deferral, [and] some of the unresolved questions are quite basic,” said Garrett Watson, senior policy analyst at the Tax Foundation. “When would the deferred tax be owed back? There isn’t a date specified. There are many options here that have to be clarified. The other big thing that's hanging over a lot of this is whether or not this deferral will turn into a meaningful reduction in tax liability owed,” he said.
Corporate tax and accounting departments have almost no direction about how they might implement a deferral, and how they would manage the potentially fraught question of clawing that money back from workers — or having to pay it themselves.
"Commentary from payroll processing firms indicates that it will be problematic, if not impossible, for businesses to make the changes needed to pass the extra money along,” said Mark Hamrick, senior economic analyst at Bankrate.com.
“The concern is, it’s not just free money,” said Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware. “It's not whether you’ll owe the money, it's when you’ll owe the money,” Elson said. “There will have to be some kind of standard to deal with this, otherwise you’ll create great disparity and confusion,” he said.
Barring congressional intervention, that money will need to find its way back into the IRS coffers, and the process of doing so could be very painful for workers.
“There's pretty high stakes there… At the very minimum, there's going to be a lot of hesitation to move forward on this,” Watson said.
“You don't want to be in a position where you have to withhold months worth of payroll taxes from employees all at once. That would create a horrible problem for people,” said Eric Toder, co-director at the Urban-Brookings Tax Policy Center.
For workers who might come to depend on the extra money over the coming weeks, an abrupt reversal combined with a sudden new obligation to repay those funds could be a financial shockwave, Toder said. “They get a big bump in their pay for a few months and all of a sudden they have to pay it all back.”
It is still unclear how the Treasury and the IRS would structure or require repayment, and the worst-case scenario could pull the rug out from many lower-paid workers. “It could be that you end up getting almost all of your wages withheld in one pay period,” Toder said.
Worker advocates were critical of the plan. Organized labor voices such as the Transportation Trades Department of the AFL-CIO slammed executive orders, saying the White House should do more to work with Congress than offer up unilateral half-measures. “It is a move that will cost jobs, weaken an already fragile economy, and further harm... workers,” the organization said.
Even some employees who would initially benefit from the deferral were ambivalent about the policy, especially given the potential of having to repay a lump sum.
“The roughly 7 percent per paycheck would be a negligible improvement,” said Doug Larocca, a 28-year-old Baltimore resident who works in marketing.
Larocca criticized a payroll tax cut because it would do nothing to help the many people he knows who have lost jobs, and he worried about having a surprise tax bill if the promise of permanent forgiveness doesn’t come to pass. “I don’t want to end up having to pay back the difference next year. I’d much rather have Congress work out a deal that helps working people,” he said.