Payroll tax cut decision affects 130,000 Colorado firms

Filed under: Daily News,Small Business | Tags:,

A Democrat full-court press campaign this week for the extension of the payroll tax cut failed to sway Senate Republicans.

Thursday they defeated President Obama’s plan to extend the payroll tax cut through the end of next year. The Senate Republicans also voted down an alternative plan backed by Mitch McConnell, R-Ky., to renew an existing 2 percentage point payroll tax cut.

Now, the issue goes back to the House to try and beat a Christmas day deadline when the existing payroll tax cuts expire.

“The bottom line is folks who ran for Congress and who pledged not to increase taxes will see that pledge broken,” said U.S. Secretary of Agriculture Tom Vilsack, who spoke with the Business Journal Thursday.

Whatever the outcome, this is a tax decision that will impact 130,000 small businesses in Colorado, he said

Under the Senate’s Middle Class Tax Cut Act 2011, small business taxes would have been cut in half on the first $5 million in payroll. Instead of paying 6.2 percent, they would have paid 3.1 percent.

Economists believe, Vilsack said, that if small businesses paid less on payroll taxes they would reduce prices of goods, reinvest in their business, hire more people or give their employees pay raises.

“If firms have more money, they would feel free to spend it and reinvest it,” Vilsack said. “Not extending the payroll tax cut means you risk getting back into negative territory.”

Republicans made their own payroll tax proposal this week. They would have extend the Social Security payroll tax cut for one year. To pay for it, they proposed a three-year freeze on federal civilian worker pay and would reduce the size of the federal civilian workforce by 10 percent through attrition.

Democrats proposed a surtax on millionaires to pay for their tax cut proposal.

The current payroll tax break reduced workers’ Social Security payroll tax rate to 4.2 percent on the first $106,800 in wages this year, instead of the normal 6.2 percent. This tax break is set to expire Dec. 31.

U.S. Senator Mark Udall, D-Colo., wrote on his web page this week that expanding the payroll tax cuts would lower the tax burden on Colorado’s middle-income workers, help business owners bolster the still-recovering economy and save the average family around a thousand dollars a year.

He put out a county by county report that shows median income and projected savings. For example, in El Paso County the median household income is $55,621. If the payroll tax is extended, it would be a savings of $1,724.

“Expanding the payroll tax cuts will not only free up more of Coloradans’ paychecks so that they can afford to support their families and local businesses, but it will also encourage their employers to hire faster and inject dollars back into their communities,” Udall said. “This is a strong step toward preventing a backslide of the progress we’ve made in our economy.”

Udall said that the Center on Budget and Policy Priorities estimates that 2.5 million Coloradans are currently benefiting from the payroll tax reduction of 4.2 percent of wages, which amounts to about $1.7 billion total.  By further cutting their payroll taxes to 3.1 percent, the bill would allow families to take home an additional $500 or so a year.

The Associated Press contributed to this report.