Payroll Taxes: A Holiday Coming?

The idea du jour for stimulating the economy--a one-month "holiday" for workers and employers from payroll taxes--seems to have won over Congress the old-fashioned way: a wave of grass-roots support. Republican Senator Pete Domenici of New Mexico has been pitching the plan for the past month. But he was getting nowhere until fellow Senators began hearing from constituents. G.O.P. Senator Bill Frist of Tennessee mentioned the idea at an economic conference at Princeton and was startled by the enthusiasm it generated among business leaders and students alike. Senate G.O.P. leader Trent Lott, on a trip home to Mississippi, says the idea was talked up by a satellite-dish installer and the clerk at his dry cleaner in Pascagoula. The plan also won support from state and local governments--themselves major employers facing budget crunches. All sides are back at the negotiating table on Capitol Hill, and the measure now stands a good chance of being part of an economic-stimulus package.

But the time it took for Domenici's idea to win the day will change the nature of the tax cut. If it had been passed soon enough to take effect in December, the plan would have mainly benefited low-income workers, who pay the tax through the entire year. (Since the tax is capped at incomes of $84,900, wealthy taxpayers generally pay no tax in December.) If the tax holiday doesn't take place until early 2002, as now seems likely, rich taxpayers will benefit too.

But that won't dampen Domenici's enthusiasm for the measure. Says he: "It's still better than anything around."

--By Karen Tumulty