Dean confirms tax cut plan, but gives no details
PORTSMOUTH, N.H. -- Howard Dean said for the first time yesterday that he will propose cutting payroll taxes to provide middle-income tax relief, but he added that he wouldn't unveil details until after Feb. 3 -- after many of the early and important primaries and caucuses are over.
Payroll taxes are those used to fund Social Security and Medicare, and the majority of Americans pay more in such levies than in income tax. One Dean adviser said the plan might involve providing an income tax credit to middle-income taxpayers to offset some payroll taxes. The employer's share of the tax burden may stay the same.
In an interview with the Globe in his campaign van, Dean addressed a rising chorus of criticism from some of his chief rivals over his changing his position on taxes. For months, Dean has called for repealing all of President Bush's tax cuts. That led to criticism from rivals such as Senator John F. Kerry and retired General Wesley K. Clark -- who advocate rolling back the tax cuts only on those earning more than $200,000 -- to say that Dean would be in effect raising taxes on the middle class.
Now, after learning earlier this week that Dean was moving toward a middle-class tax relief package, some of Dean's rivals have been saying he made a politically calculated flip-flop.
"We are going to do something and it's going to have to do with the payroll tax, but we haven't worked it out yet," Dean said.
Asked whether it was fair to voters in the Iowa caucuses and New Hampshire primary for him to campaign without explaining such an important proposal, he replied, "Well, they are going to know that I'm a fiscal conservative and that I'm going to balance the budget. That is the most important thing for them to know and they should know that while we intend to revamp the tax code, balancing the budget comes first. I can't give them any more details than that because we don't have them."
The Globe reported earlier this week that Dean's economic advisers had unanimously recommended that Dean adopt some kind of middle-income tax relief package. Some of the advisers were concerned that Dean would be especially hurt in a general election if he is attacked by Bush for raising taxes by $2,000 on a family earning $73,000.
When asked yesterday why he has delayed a detailed announcement, he said, "I haven't been able to talk to the policy people in a while and I won't until after Feb. 3." That is when South Carolina, New Mexico, Arizona, and several other key states hold their primaries. The New Hampshire primary is Jan. 27.
Dean's policy director, Jeremy Ben-Ami, called the Globe at 8 p.m. to make what he called an addition to Dean's statement. Ben-Ami said it is always possible that Dean would pick an option other than payroll taxes as a vehicle to provide middle-income relief. "The governor is clearly weighing the options, but no final decision has been made," Ben-Ami said.
Without the details of Dean's proposal, it is difficult to analyze it. But the main controversy about any proposal to cut the payroll tax revolves around the question of whether such a cut would drain revenues from the Social Security Trust Fund, which is financed by payroll taxes.
Dean stressed that he didn't want to any reduction in payroll taxes to take funds away from Social Security. Thus, he said that he would get around that problem by using money from general revenues to make up for all the money lost under a payroll tax cut.
While Dean said he couldn't provide more details, an aide who talked about the idea with the former Vermont governor said one idea is to provide an income tax credit for payroll taxes paid by people in certain income groups. In that scenario, a worker would essentially be reimbursed through the federal income tax code for some funds taken out of his or her paycheck for Social Security.
The adviser, who said the campaign did not want him to speak on the record, said that would satisfy Dean's requirement that a cut in payroll taxes not result in a decline in funds for Social Security.
But the idea of financing tax relief to the middle class through general revenues was promptly ridiculed by Grover Norquist of Americans for Tax Reform, a conservative Republican strategist who has close ties to the White House. "There is no money in the general fund. You are talking about bankrupting Social Security," Norquist said.
Norquist and the White House favor a plan under which workers could take a percentage of the payroll taxes they pay and instead invest it in the stock market. President Bush has not done much to push that idea, which some consider a partial privatization of Social Security.
Some politicians who have advocated a reform of the payroll tax system have suggested another method in which wealthier workers would pay more for Social Security benefits. Currently, the Social Security tax is collected is on the first $87,900 of income. As critics have long noted, that means that someone earning that amount pays the same Social Security payroll tax as Microsoft's Bill Gates.
But Dean said that he was against raising the "cap" as a method of financing a tax cut. Dean said he would consider raising it only if he was convinced that more money was needed to support Social Security.
Although the payroll tax doesn't get much mention in political debate, it has a deep impact on most taxpayers. The Tax Policy Center, which analyzes taxes with the Brookings Institution think tank, reported that 74 percent of all tax filers paid more in payroll taxes than in income taxes. The payroll taxes are typically withheld by the employer, so many people may not realize the size of the payroll tax levy.
Another major issue regarding the payroll tax is that some critics believe it is too regressive. For example, a filer earning between $40,000 and $50,000 pays 12.2 percent of his income in payroll taxes and 8.5 percent in income taxes, according to a study by the Tax Policy Center.
By contrast, a worker earning more than $500,000 pays 3.5 percent of income in payroll taxes, and 27.3 percent in income taxes.
There are four levies on wages. Workers pay 6.2 percent of their wages to Social Security, and employers paying another 6.2 percent, and both employees and employers pay a Medicare tax of 1.45 percent on all wages, with no cap, according to figures provided by the Center on Budget and Policy Priorities.
Michael Kranish can be reached at kranish@globe.com. 