Trump's Fake Payroll Tax Cut Is A Big Mess

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In August, President Donald Trump took unilateral action to help the economy weather the coronavirus pandemic by putting more money in people’s pockets: The government would take less money out of every paycheck by deferring payroll taxes, essentially giving everyone a raise.

Trump has loved the idea of juicing the economy with a payroll tax cut, just like his predecessor Barack Obama did from 2011 through 2012. Congress wouldn’t go along with Trump’s proposal, however, so the president did it himself.

But there was a catch with Trump’s plan ― the money would have to be paid back next year, meaning it’s not a tax cut so much as a deferral.

Most private employers appear to have opted out of the scheme, citing its administrative difficulty, and so did the U.S. Postal Service. But Trump decided to force it on his own workers — more than amillion employees of the federal government.

Now, those civil servants must deal with the headaches of a loan they never asked for.

The tax deferral applies to the employee’s share of Social Security taxes, amounting to 6.2% of wages, which for most workers is withheld by their employer. The executive action increases their biweekly paychecks from September to the end of the year. But unless Congress and the White House forgive those loans through legislation, workers will have to return the money through payments or higher withholdings — and smaller-than-usual paychecks — in 2021.

This hardly registers given the pandemic and everything else that is buffeting the economy. Economist Mark Zandi

Personal Finance for Dummies would advise a worker to figure out how much extra money they’re receiving now and set it aside under the assumption that Uncle Sam will expect it back in a few months. Not only does that discipline create some annoying administrative tasks, it defeats the shaky justification for the policy: to pump stimulus into the economy.

Michael Knowles, an employee in the U.S Citizenship and Immigration Services and the president of his union, the American Federation of Government Employees Local 1924, said the whole thing really is as pointless as it sounds.

“No one that I’ve talked to can figure out how this helps,” said Knowles, speaking in his role as a union representative. “This is supposed to be the president’s way of helping us get through a rough spot due to COVID-19. This is not any kind of relief at all. It’s just another, at best, distraction, but at worst it could put [people] in a financial bind.”

Knowles has been advising confused union members to go through their past paystubs to determine how much additional pay they’re getting and to plan for a lean 2021. He said his agency put out a frequently-asked-questions document for employees that wasn’t all that helpful. He doesn’t blame the agency — the Trump administration hasn’t made clear how it’s supposed to work.

An FAQ memo from the Department of the Interior shows how little information employees have to go on. It says workers should plan on paying the money back through withholdings next year, but it’s sketchy on how much will be collected from each paycheck, and how tax penalties will apply: “As more information becomes available ... it will be shared with the workforce.”

President Donald Trump gives a thumbs up as he walks to board Air Force One, Wednesday, Oct. 14, 2020, at Andrews Air Force Base. (Photo: ASSOCIATED PRESS)
President Donald Trump gives a thumbs up as he walks to board Air Force One, Wednesday, Oct. 14, 2020, at Andrews Air Force Base. (Photo: ASSOCIATED PRESS)

Trump intended for the tax deferral to boost the economy. Millions of people remain out of work due to the pandemic, and Congress and the White House have so far failed to reach agreement on more stimulus legislation.

But Mark Zandi, chief economist at Moody’s Analytics, said the payroll policy will have no meaningful impact. By his reckoning, it amounts to giving federal workers a three-month loan worth $5.5 billion.

Besides, most federal workers have been continuously employed throughout the crisis, and in less need of a loan than laid-off workers in the private sector.

“Even if federal workers spent all of the $5.5 billion loan, which is unlikely as they know it is simply a short-term loan, it would add less than 0.1 percentage points to fourth quarter growth, and subtract about the same from growth early next year as they paid the loan back,” Zandi said. “This hardly registers, given the pandemic and everything else that is buffeting the economy.”

Guidance from the Treasury Department warns that taxpayers affected by the deferral will have to pay the money back between January and April of next year “or interest, penalties, and additions to tax will begin to accrue on May 1, 2021.”

The guidance doesn’t explain how the money would be paid back. A spokesperson for the Treasury Department referred questions to the White House Office of Management and Budget, which did not respond to a request for comment.

No one that I’ve talked to can figure out how this helps. Michael Knowles, president, AFGE Local 1924

Terry Scott, an IRS employee and the president of National Treasury Employees Union Local 26 representing IRS employees in Atlanta, said the policy would be less problematic if employees had a choice in the matter. The executive order applies to federal workers earning less than $4,000 per pay period, which amounts to a salary of around $100,000.

“The majority of employees I talked to would have liked to opt out,” Scott said.

He still doesn’t understand how the repayment will work.

“Is it going to start incrementally? Are they going to get a notice stating they owe X number of dollars? Are they going to be required to report this as additional income on their tax returns? We have no specific information on how they expect to get this money back.”

Other questions: What happens if someone switches jobs before the tax is fully repaid? How might this affect someone’s Social Security payments in the future if the deferrals are never paid back?

Trump has said he plans to forgive the taxes "if I’m victorious on Nov. 3.” In other words, he expects Congress will bail him out on a costly plan.

It would seem like the confusion might be worthwhile for federal employees on the off chance the loan is eventually forgiven. But that’s a highly unlikely scenario. For starters, no one knows who will occupy the White House and control Congress when the bill comes due. Regardless of who’s in power, there would seem to be little desire in either party to turn the loan into a gift for government workers.

Many Republican lawmakers push for cuts to the federal workforce and pay freezes. Democrats are friendlier to federal workers, but don’t want to jeopardize social insurance funds. That’s why they opposed Trump’s executive order in the first place: Cutting payroll taxes can weaken the financial position of Medicare and Social Security.

Rep. Don Beyer (D-Va.), who represents a disproportionate share of federal workers in his suburban Washington district, called Trump’s gambit “openly corrupt”: “Vote for me and I will pay you, otherwise your paychecks will decrease in January.”

How the tax deferral is supposed to play out may not get any clearer in the immediate wake of the election. If Trump loses, he might not care enough to sort out his own executive order as a lame-duck president.

And the sloppy implementation suggests he might not care even if he wins.

“There are a lot of mysteries in this executive order,” Knowles said.

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This article originally appeared on HuffPost and has been updated.