WASHINGTON (Reuters) - Failure to extend a payroll tax holiday into 2012 could trigger another recession, noted U.S. economist Mark Zandi said on Thursday, as Democrats called the extension a top priority needing quick action.
Expiration at year-end of the tax holiday, emergency unemployment benefits and other stimulus efforts could shave up to 1.7 percentage points from gross domestic product in 2012, said Zandi, chief economist at Moody's Analytics.
"The economy is struggling to avoid another recession," Zandi said at a congressional roundtable on tax incentives and the economy.
He called the situation "a dramatic reversal from the beginning of the year."
Without the tax holiday extension, he said, "We will be back in a recession."
Under the tax holiday, the payroll tax -- which funds the Social Security retirement system -- was reduced to 4.2 percent for employees at the beginning of 2011. The rate is due to revert to 6.2 percent at the end of this year.
President Barack Obama's jobs package introduced last month would extend and expand the employee payroll tax holiday, dropping the rate 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.
Obama's plan also would exempt businesses from payroll taxes if they increase their payrolls by $50 million from the previous year. Businesses can add new workers or raise salaries for their existing employees.
The extension would cost $245 billion and is the largest spending part of the president's jobs bill, according to the Congressional Research Service.
For small businesses, the holiday extension will "encourage real hiring," said Todd McCracken, president of the National Small Business Association. He said ultimately Congress needs to pass a long-term deficit reduction and tax reform package.
One key attribute of the payroll holiday is that it "is incredibly straight-forward" and helps businesses without complicated direct-assistance tax credits, Zandi said.
Additional spending for emergency unemployment insurance will not have significant stimulative effect, Zandi said.
Democratic Senator Robert Casey, chairman of the Senate Joint Economic Committee, which held the roundtable, emphasized urgency in implementing the payroll tax holiday.
"If (Zandi) is right -- that we are too close to another dip -- then we need to act soon," Casey told Reuters.
Reporting by Patrick Temple-West; Editing by Kevin Drawbaugh and Leslie Adler