by Lowell L. Kalapa, Tax Foundation of Hawaii

Here we go again with another round of spending in an attempt to convince voters that the national leadership knows what they are doing.

In an effort to secure reelection, the administration has strutted out a plan to create thousands of jobs by implementing a spending plan that will rely on tax increases and additional spending cuts. However, what should be even more disturbing to taxpayers, as well as to current and future beneficiaries, is the administration’s proposal to extend the reduction in payroll taxes otherwise known as employee Social Security contributions.

As many will recall, in an attempt to turn the tables around and pull the country out of recession, the administration proposed, Congress obliged, and the amount paid by employees in FICA taxes was reduced for the current calendar year from 6.2% of gross pay to 4.2%. Undoubtedly this move was predicated on the assumption that it would put more money in workers’ paychecks and that it would then be spent to stimulate the economy. The reduction was to be temporary and would cost the system roughly around $112 billion. The idea was also based on the assumption that the resulting stimulus would create new demand for goods and services and, therefore, new jobs that would result from that increased demand.

Well, as we all have watched, the national unemployment rate has not receded still hovering around 9% of all those unemployed and looking for work. While that statistic is alarming, it is for only those who are looking and who are unemployed. It does not include those who are “under-employed” or part-time workers who would like to secure a full-time job and those who have given up looking for a job. That rate has risen as high as 15%. But officials don’t want to acknowledge that there is that many more looking for a job.

The administration not only wants Congress to extend the payroll tax cut, but reduce the rate even further to 3.1%, half the previous rate and half of what the employer still has to pay on payroll. So it doesn’t sound like a bad idea until one realizes that it reduces the amount that would go toward paying benefits to current and future beneficiaries of the system. But wait, the administration will underwrite that loss and make the Social Security system whole by appropriating the amount of lost revenues from the federal general fund, a fund that is paid for by your income taxes. So while the plan looks responsible by filling the gap in Social Security contributions, it will do so by “stealing” money from the general fund.

The administration=s cut in the payroll tax will apply to the first $5 million in wages, providing broad tax relief to all businesses by targeting it to the 98% of firms with wages below this level. So it appears like this is a cut for “small businesses” or at least employees of these small businesses. In Hawaii where the bulk of businesses have fewer than 50 employees, it is projected that 30,000 firms will receive a payroll tax cut under the American Jobs Act.

So, instead of addressing the cost of Social Security and fixing the financial future of the system, this proposal, instead, jeopardizes its financial stability. Not only should current and future beneficiaries be alarmed, but the unemployed should ask how this payroll cut will create the jobs they need. As we have seen, the current payroll reduction hasn’t stimulated the economy nor created the needed jobs. What this proposal does not recognize is that until employers regain the confidence that consumers will return to the marketplace and find the capital to support the expansion of their businesses, will there be no creation of new jobs.

The plan includes $50 billion in spending for highways, transit, rail and aviation, which is projected to invest $174 million in Hawaii resulting in about 2,300 local jobs. Another $35 billion would be spent to prevent layoffs of up to 280,000 teachers and hiring law enforcement personnel and firefighters. Again, Hawaii’s share is expected to provide $122 million to support up to 1,500 educator and first responder jobs.

How does the administration expect to pay for these and other spending proposals? With tax increases on the “rich” like a tax on those who own their private jets or limiting the amount of itemized deductions high-income taxpayers can claim on their income tax return? Unfortunately, these proposals pander to the political and will indeed have undesirable consequences much like the proposal to impose higher taxes on yacht owners had on those who were employed to maintain these symbols of luxury or an earlier limit on itemized deductions had on generous contributions to charity.

So much for setting the nation’s economy back on course!

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