WASHINGTON - February 4 - The Congressional Budget Office's (CBO) most recent set of baseline budget projections (The Budget and Economic Outlook: Fiscal Years 2005 to 2014), released January 26, indicate that for the first time in history, federal payroll tax revenues are catching up to and may soon outstrip federal income tax revenues.
The report primarily addresses growth in budget deficits, whose upward revisions in the wake of President Bush's budget proposal reached record highs and made headlines in recent days. But embedded in its tables is a different record high, no less worrisome: payroll tax revenues in FY2004 are projected to rise from $713 billion last year to an estimated $747 billion in the current fiscal year, just short of the $762 billion in projected revenues from individual income taxes. This puts payroll tax revenues at 41.1 percent of total federal revenues, while individual income tax revenues account for just 41.9 percent of total revenues.
Payroll taxes are therefore within less than a percentage point of overtaking income tax as the chief contributor to federal revenue, a statistical dead heat.
Just four years ago, FY2000 payroll tax revenues (principally collected for Social Security and Medicare) accounted for just over 32 percent of federal revenues. But US income tax receipts declined sharply since then, while payroll tax receipts grew steadily to over 40 percent. The two trends are now dramatically converging, both according to the CBO and the Office of Management and Budget (OMB) -- see chart prepared by the BBC using OMB data (full BBC story at http://news.bbc.co.uk/2/hi/business/3451975.stm and also posted at www.getamericaworking.org ).
Beyond FY04, the baseline budget projections do not show payroll taxes overtaking individual income tax revenues in the near future. However, baseline projections assume no change in current law, so they do not take into account the Administration's stated goal of making many of the recent income tax cuts permanent, and they also presume that payroll taxes will not have to be raised to keep Social Security and Medicare solvent. In addition, rising cost estimates of the new Medicare prescription drug benefit indicate there will be budgetary pressure to raise payroll taxes sooner than previously thought.
Bob Walker, president of Get America Working!, a bipartisan nonprofit group focusing on employment policy, said, "Our unprecedented and still growing reliance on payroll taxes, as much as the increase in the budget deficit, is a matter of serious concern to all those who care about the economy. A large budget deficit depresses national savings, but rising payroll tax reliance inflates hiring costs and depresses job creation. New job creation is vital to the long-term health and growth of the economy. It should be our top economic policy priority."
Get America Working! (www.getamericaworking.org) advocates fuller employment through stimulating labor demand and job creation, including via reducing reliance on payroll taxes. Rather than increasing to record levels dependency on taxes that discourage employers from hiring and workers from working, GAW! advocates replacing payroll taxes with taxes on waste of natural resources, such as energy inefficiency and pollution.
The aim is to make businesses more labor-intensive and less resource-intensive, creating environmental and social benefits and shrinking government dependency costs while stimulating economic growth.
After a brief uptick this fall, new job creation returned to depressed levels in recent months, indicating continued fundamental weakness in the job market. "Policymakers routinely underestimate the true extent of unemployment today and its associated costs," says Walker. Studies show in addition to the nearly nine million officially unemployed, many more -- perhaps tens of millions -- are in the ranks of the hidden unemployed: they would be eager to work if they had employment opportunities, but their joblessness and lack of opportunity to work are not registered in Labor Department unemployment data.
"Given the gross underutilization of human capital in this economy," says Walker, "raising nearly half of federal revenue from a tax on hiring is a matter of urgent national concern."