Congress mulls over way to reduce payroll taxes
Atlanta Business Chronicle - by Sougata Mukherjee Washington Bureau Chief
WASHINGTON -- Small businesses looking for a tax break from Congress finally may have found a way to get it -- through Social Security.
After relentless lobbying over the past two years, some lawmakers now seem to be taking a back-door approach to providing small businesses and their workers with payroll tax relief.
Sen. Dan Moynihan, D-N.Y., suggests letting workers divert 2 percent of their payroll taxes into private retirement accounts. Workers would be given a number of retirement investment options, all tax-deferred.
"Moynihan has volleyed the first shot to see if the payroll taxes can be put to better use to save Social Security," said Todd McCracken, president of National Small Business United. "We are now trying to convince other lawmakers to go along with the reduction of the payroll tax rate."
In 1955, payroll tax accounted for only 1.5 percent of the earnings of a two-income family. Today, that tax burden has shot up to 7.65 percent per member. For small businesses, it is worse because they have to match an employee's contribution.
Sen. John Ashcroft, R-Mo., who has long been a critic of the increasing payroll tax rate, has floated the idea of allowing individuals to deduct the payroll tax amount from their income when they file their tax returns. But Ashcroft's proposal does not address any tax cut for small businesses.
Currently, small businesses can deduct the payroll tax from their annual income when they file their tax returns.
"But if a small business is losing money, there is no deduction," McCracken said. "That's why it is important for lawmakers to cut the payroll tax rate, not just allow deductions on income."
Moynihan's proposal to divert 2 percent of the payroll tax into retirement accounts would reduce the tax rate to 5.65 percent for every employee.
However, at a time when every tax cut has to be offset by revenue increases from other sources, some lawmakers are leery about cutting payroll taxes.
Rep. Bill Archer, the Texas Republican who heads the House Ways and Means Committee, wants to provide small businesses with some tax relief this year, but is not sure whether the payroll tax will be the mechanism to do so.
Archer already has suggested putting an excise tax on cigarettes to fund a tax break for small businesses. His office has calculated that a cigarette excise tax could bring in $10 billion, enough to allow small businesses a 100 percent deduction of their health-care insurance costs and perhaps enough to further reduce estate taxes.
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