Lawmakers on Monday were locked in negotiations trying to close a deal that would, in part, prevent a separate tax - the income tax - from rising for all but the wealthiest taxpayers.
Unlike income taxes, which rise along with a worker's income, the payroll tax is a fixed percentage of an employee's salary. Allowing the tax cut to expire will increase taxes on salaries by 2 percent for every American worker. Up to $110,100 a year in salary is subject to the tax.
This jump in payroll taxes, combined with other tax increases affecting the very wealthy likely to take effect in the new year, would make for the largest increase in taxes in about half a century.
While the end of the payroll tax holiday appears to be a near certainty, Democrats and Republicans agree in principle that low tax rates enacted under President George W. Bush should be extended for the vast majority of Americans - with negotiations over the exact threshold ongoing for most of Monday. If lawmakers fail to pass a law extending those tax cuts, allowing them to expire on Tuesday, it would mean thousands of dollars out of the pockets of average workers, the largest tax increase on Americans since World War II.
But if lawmakers seal a deal to extend Bush-era tax cuts for most Americans, the payroll tax cut expiration is the only tax increase that most workers would experience. Higher-income earners would face steeper income taxes and potentially fewer tax breaks, as well as a new tax to pay for the Affordable Care Act health-care legislation.
Because of the expiration of the payroll tax cut, a worker earning $50,000, for instance, would pay $1,000 more in taxes next year; meanwhile, a worker earning less than $20,000 a year would pay about $100 more in taxes. Someone in the upper fifth of households, making $150,000 a year, will pay about $2,200 more.
The increase in taxes on workers next year means that "the era of asymmetrical tax policy - where taxes can only go down - is over," said Jared Bernstein, a former White House economic adviser. While the Obama administration fought for the payroll tax cut in previous years to goose a weak economic recovery, the White House has been more ambivalent this year. Before the election, even as prominent Democratic economists and lawmakers argued in favor of extending the tax cut, the White House declined to call for its renewal.
Then, during its post-election talks with congressional Republicans, the Obama administration requested an extension. But Republican lawmakers were skeptical, viewing the payroll tax holiday as contributing to federal deficits because the Treasury had to borrow money to replace payroll tax revenue, which ordinarily would go to fund Social Security. The administration quickly dropped the payroll tax cut from negotiations.
The tax hikes will come after a period of tax cutting that began in 1997. That year, President Bill Clinton trimmed rates on investment income. President George W. Bush cut a wide range of taxes in six of his eight years in office, first as a response to projected budget surpluses and later in an effort to stimulate the economy.
President Obama continued the trend, cutting taxes in 2009 and then even more deeply in 2011, largely in response to the deep recession.
As a result, nearly half of American workers likely have never experienced a tax increase.