Scenarios: Expiring tax breaks loom beyond "super panel"

WASHINGTON Mon Nov 21, 2011 6:54am EST

WASHINGTON (Reuters) - Whatever happens to the Congress' deficit-fighting "super committee," world markets are increasingly concerned about several temporary tax breaks vital to the economy that are set to expire at year-end.

One is the Obama administration's payroll tax cut. Another is a "patch" to prevent the alternative minimum tax (AMT) from hitting middle-class taxpayers. Still others include deductions for state and local sales tax and for college tuition.

Corporations are anxious about business credits expiring on December 31, such as one for research and development. In addition, unemployment insurance is a top worry in a sluggish economy that some say could easily tip back into recession.

Here is a brief look at key items and what might happen:

PAYROLL TAX CUT

Payroll taxes - which fund the Social Security retirement system - were cut to 4.2 percent for employees at the start of 2011. The rate is due to revert to 6.2 percent at the beginning of 2012 if Congress takes no action.

President Barack Obama's September jobs package would extend and expand the cut, dropping the rate for employees further to 3.1 percent for 2012.

The rate for employers, which has remained at 6.2 percent this year, would fall to 3.1 percent on the first $5 million in payroll, under the president's plan, which would also exempt businesses from payroll taxes if they increase their payrolls.

The president's payroll tax extension would cost $245 billion in forgone government revenues.

RBC Capital Markets estimated that allowing the payroll tax cut to expire at year-end would reduce U.S. gross domestic product growth by 1 percentage point in 2012.

This issue, like others below, could be included in whatever deal comes out of the super committee, though that seems unlikely given the panel's rapidly dimming outlook.

The payroll tax question also could be dealt with later as part of a catch-all, end-of-year spending bill.

"Failure by Congress to extend the temporary payroll tax cut enacted last December would reduce paychecks starting on January 1, withdrawing needed support from the still-weak economy," said a recent report from the Center on Budget and Policy Priorities, a Washington think tank.

The tax cut is worth $934 a year to the average worker, the center estimated.

UNEMPLOYMENT BENEFITS

Unemployment insurance is a federal-state program that gives workers temporary pay substitution benefits. Through the recession and its aftermath, Congress has extended unemployment benefits up to 99 weeks.

Beginning on January 1, 2012, those collecting extended benefits will begin to roll off the federal programs. By mid-February, 2.1 million people will be unable to continue on extended federal benefits, said the U.S. Labor Department.

The president has proposed more funding for unemployment insurance with reforms to the system.

JPMorgan Chase economists estimated the loss of unemployment benefits, combined with an expiring payroll tax cut, would shave 0.75 percentage point from GDP growth.

TAX EXTENDERS

Congress traditionally passes an end-of-year "extenders" bill that renews tax breaks that have not been permanently written into law. These provisions include an AMT "patch," which would exempt middle-class workers from additional taxes.

Businesses are set to lose "bonus" depreciation tax write-offs for new purchases, and the tax credit for research.

Making the research credit permanent is an idea with bipartisan support in Congress and from the Obama administration. Some in Congress also want to expand it.

Such tax extenders, some say, could help shape a deal in the super committee, though others have said extenders will lapse again, as they did in 2010, and will only be renewed retroactively by a lame-duck Congress in December 2012.

Failure to approve tax extenders before the end of 2011 could hurt the economy.

(Reporting by Kevin Drawbaugh, Patrick Temple-West, Stella Dawson, Donna Smith. Editing by Kevin Drawbaugh)

FILED UNDER: