Payroll tax cut in its last lap?

@CNNMoney May 29, 2012: 9:58 AM ET
If the payroll tax cut expires, 160 million workers will see a drop in pay.

NEW YORK (CNNMoney) -- The payroll tax cut you've enjoyed since last year may be going away in January.

And for most Americans, it's one of the most concrete pieces of the so-called fiscal cliff -- $7 trillion in tax hikes and spending cuts set to take effect next year.

The payroll tax cut -- worth 2% of the first $110,100 of one's wages -- started in 2011 and remains in effect until Dec. 31. It noticeably increased paychecks for workers. A person making $50,000 has enjoyed roughly $83 extra a month, while someone making $110,100 has been taking home an extra $183.50 a month.

Unless Congress decides to extend the policy for another year, workers' take-home pay will be reduced by similar amounts starting in January. That's because the payroll tax rate -- temporarily set at 4.2% -- will revert to its original 6.2%.

The cut in the payroll tax -- which funds Social Security - was intended to temporarily bolster consumer spending and therefore help the economic recovery.

If it expires as scheduled, the Congressional Budget Office estimates that federal revenue will increase by $95 billion next year.

Its expiration could reduce real economic growth by up to half a percentage point in 2013, according to Capital Economics. By contrast, letting all the scheduled tax hikes and spending cuts go into effect on Jan. 1 would cause the economy to fall back into recession, the Congressional Budget Office estimates.

It's impossible to predict what Congress will do. But the payroll tax cut may be one provision both parties are willing to drop given all the other tax hikes and spending cuts they'll want to prevent.

"Right now, everyone in Washington is [thinking] 'This can be let go,' " said Sean West, director of U.S. fiscal policy analysis for the Eurasia Group.

There are a few reasons why.

First, the economy is stronger now than when the payroll tax cut was first passed.

Second, if lawmakers decide to extend most or all of the Bush tax cuts, they can still say they are preserving major tax relief, noted Clint Stretch, managing principal of federal tax policy at Deloitte Tax.

And third, there has not been a public push for a payroll tax cut extension. Treasury Secretary Tim Geithner said in testimony earlier this year before the Senate Budget Committee that "this has to be a temporary tax cut. I don't see any reason to consider supporting its extension."

What's more, some conservatives haven't been big fans of the payroll tax cut as stimulus.

And some liberals don't like it because it creates the perception that Social Security isn't self-financed. That's because the revenue lost to the Social Security trust fund as a result of the tax cut is being made up for with general revenue from the U.S. Treasury.

Of course, the dynamics could change if the economy turns weaker and calls for stimulus get louder, said Eric Solomon, co-director of Ernst & Young's national tax department. (See correction)

In the end, there's no way to know for sure: The payroll tax cut is popular and lawmakers may try to use it as a rich bargaining chip in what will be the biggest fiscal poker game they've ever played.

Correction:An earlier version of this article incorrectly identified Eric Solomon's last name. To top of page

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