Rep. Chris Van Hollen: Save the payroll tax cut!

October 24, 2012

Rep. Chris Van Hollen (D-Md.) is the highest-ranking Democrat on the House Budget Committee. He made his name in Congress as a campaign strategist, but he's since transformed into one of the Democrats' leading budget wonks and was a member of the supercommittee. Van Hollen recently pushed to include an extension of the payroll tax cut, which is scheduled to expire on Dec. 31 as part of the fiscal cliff. It's one issue that's found few defenders in either party.

We spoke on Tuesday about this and other issues at the heart of the fiscal cliff. A lightly edited transcript of our conversation follows.


( Melina Mala -- The Washington Post)

SUZY KHIMM: You recently said that a payroll tax extension should be on the table in the fiscal cliff negotiations. Can you explain in a bit more detail why you think this would be a good idea?

CHRIS VAN HOLLEN: The payroll tax cut extension would put more money in the pockets of 136 million Americans and help boost economic growth. So my point is this: We should not even be considering extending tax breaks for high-income individuals, which do virtually nothing to help the economy but increase the deficit — we shouldn't be talking about that when obviously there is a better alternative on the table.

The Social Security actuary made it clear that it doesn't take one penny out of the Social Security Trust Fund. Every dollar of the payroll tax cut would be backfilled by a dollar from general revenue.

SK: Some critics like the AARP worry that using general revenue to support the Social Security — to substitute for the revenue lost from the payroll tax cuts — lays down a path to make the program part of the larger budget, and potentially subject to future budget negotiations and cuts.

CVH: Let's be very clear — [the payroll tax cut extension] is a temporary measure. We've gone through an extraordinarily difficult economic period. Everyone would agree the economy remains fragile. This should be considered for another year. Its multiplier effect on jobs and the economy is much more powerful than other ideas that have been put on the table. It's certainly more powerful than providing a tax break for very wealthy people, who are essentially sitting on their funds.

SK: What about extending federal unemployment benefits, which are also set to expire? Do you think they should be considered as well?

CVH: I think that has to be part of the conversation as well. That needs to be in the mix. Helping people who lost their jobs through no fault of their own and are struggling to find work — providing them with support — helps not just them, but the economy. 

SK: One thing that's curious to me — you might not realize it listening to the debate, but the fiscal cliff is deficit reduction; it just happens very suddenly, in a way that no one wants. If you really wanted the complete opposite of fiscal cliff, you'd be arguing for fiscal stimulus. But it seems like a lot of people aren't hearing that. What do you make of this?

CVH: We have to accomplish twin goals, and those goals are not mutually exclusive; they can be mutually reinforcing over the long term. We need to take measures to nurture the fragile economy and accelerate the recovery. The conversation should include a one-year payroll tax cut extension and other pieces we've talked about. At the same time, it's important to come up with a long-term predictable, credible, deficit-reduction plan that gets long-term deficits under control. That will lay a strong foundation for long-term economic growth.

SK: Do you have any concern that prioritizing long-term deficit reduction will overshadow the need for short-term stimulus?

CVH: What's important is to keep our eye on these twin objectives and not allow one to undermine the other in either direction. The short-term priority is to accelerate the economic recovery, which will also help recover our long-term deficit. The more people we're able to put to work quickly, the more we'll be able to reduce our long-term deficit. It's important to put us on a credible stable path to long-term deficit reduction. The nature of that path should focus on deficits over the long-term — you don't want to do anything to contract anything in the economy over the short term. You can put that into law now changes that will kick in several years from now.

Just for an example: If you were to replace $30 billion of the sequester for next year with eliminating the tax breaks for big oil companies, that amounts to about $40 billion, but that $40 billion comes over a 10-year period. The benefit from the deficit perspective is the same, but you do not get the net impact on the economy of the sequester cuts next year. 

SK: Why focus on long-term deficit reduction now? Obviously, we can't put it off forever. But do you think there's a compelling reason to tackle this right now, as part of these fiscal cliff negotiations?

CVH: I think it's important to establish a process and a structure over the coming year to negotiate a long-term deficit reduction plan. For example, I believe that we need to tackle our long-term deficits through a balanced approach. I think now is the time to discontinue the Bush tax cuts for very high-income earners. I think we need to make a credible demonstration that we're serious about reducing the long-term deficit. We should do it in a way that doesn't come at the expense of accelerating economic growth now.

SK: In an ideal world, it seems like we'd want to have a deal as soon as possible rather than go off the cliff. But can you imagine circumstances under which it'd be preferable to strike a deal after Dec. 31 than before it, rather than going with a deal just to avoid going off?

CVH: Let's put it this way — the keys to the tax portion of the fiscal cliff are in the hands of Congressional Republicans. The president has been very clear that he wants to immediately extend tax relief to 98 percent of the American people. In fact, let me just clarify that — to 100 percent of the American people on the first $250,000 of family income, then extend full tax relief to 98 percent of American people.

Republicans have essentially said, unless high income gets a bonus tax break, nobody else in America gets tax relief. It becomes politically unsustainable starting Jan. 1. If the Republicans insist on holding 98 percent of American taxpayers hostage, they will have to quickly re-evaluate their position starting Jan. 1.

SK: Do you anticipate facing any of the same challenges that you faced in the supercommittee, or do you think the dynamic will have changed, in terms of both the process and the ultimate outcome?

CVH: One part depends on the outcome of the election: I believe the president will win reelection, then there are few pragmatic Republicans who recognize that revenue has to be part of a balanced deficit reduction plan. I'm not expecting a full conversion of tea party House members.

What I take greater comfort in is the structure of the situation at the end of the year, which I think has the potential to produce a positive outcome. The structure is that all the 2001 and 2003 tax cuts end by law on Dec. 31. If you look at the 10-year value of those tax cuts, it amounts to about $5 trillion. I'm certainly not proposing, and I don’t know anyone else who is, that we allow all those tax rates to reset. But what it demonstrates is that the president's position — which is that we need revenue as part of a deficit reduction plan — it does now create an opportunity to direct some revenue to a deficit reduction plan. 

Republicans are taking the position that they'd rather go off the fiscal cliff entirely, which amounts to $5 trillion in tax revenue, rather than contribute some lesser amount to deficit reduction. 

SK: So you seem to be saying that if we go off the fiscal cliff, it will be the Republicans' fault for not having compromised on revenues, it won't be Democrats throwing us off the cliff. Is that right?

CVH: The president has been clear that what Republicans would be choosing is to hold 98 percent of the people hostage to getting a bonus tax break for wealthy Americans. I think that the choice is theirs. And I think starting Jan. 1, the Republican position becomes totally unsustainable with the public.

SK: Your colleague on the Senate side, Chuck Schumer, said recently that we shouldn't do tax reform by lowering tax rates, then finding the revenue to make up for it through closing tax expenditures and loopholes, as Simpson-Bowles has proposed, and as Romney has proposed to do. What's your take on Schumer's comments? 

CVH: I've always said we should first allow the top rate to return to where it was during the Clinton administration, then we can talk about tax reform and simplifying the tax code. We can look at tax expenditures, but the conversation should begin at the Clinton-era tax rates for high-income earners.

And that is totally consistent with the revenue projection from Simpson-Bowles. The Simpson-Bowles recommendations assume in their baseline that we will have the same amount of revenues we would gain if the top rate went back to around 39 percent. That's really important: Their deficit reduction numbers, deficit as a percent of GDP — they all assume this revenue. We need to capture that revenue from allowing the higher-income earners to go back to Clinton-era levels. That's totally consistent with the Simpson-Bowles proposal. Then, if you want to start talk about lowering rates, then Republicans can start proposing which deductions they want to eliminate.

SK: So what do you think would be a path forward for the fiscal cliff negotiations, as we move closer to the deadline?

CVH: We need to be focused on reducing the deficit in a balanced way: the math is pretty simple: If you don't ask for one additional penny from high-income earners to reduce the deficit, you hit everyone else much harder. You hit seniors on Medicare much harder. You hit our investments in education. And you undermine our investments in science and research to make the American economy competitive. These are important trade-offs — I'm simply tracking the Simpson-Bowles recommendations there; that revenue is incorporated in their recommendations. Then they do another trillion of revenue on top of that.

SK: Speaking of investments — do you think we should consider other forms of stimulus that go beyond what's already in the fiscal cliff, beyond the payroll tax cut and unemployment benefits, in order to boost the economy right now? Like investments in infrastructure, state and local fiscal support? 

CVH: I think the President's jobs initiative should be part of that conversation. It's been sitting in front of the Republican House of Representatives for over a year now. It calls for very important investments in our national infrastructure — we need those investments to strengthen our economy and improve our national competitiveness. It's a win-win — investments to strengthen our economy, when you have almost 14 percent unemployment in our construction industry. You would be putting people back to work.

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