View all Articles
Commentary By Diana Furchtgott-Roth

Payroll Tax: GOP Hands Obama Potential Victory

Economics, Economics Tax & Budget

Luck has once again struck President Barack Obama-if he has the wit to recognize it and use it.

The Republican-controlled House of Representatives has just handed him a potential victory in next November’s election by passing a payroll tax bill which, if it becomes law, would also speed up approval of the Keystone XL pipeline and reduce the duration of unemployment benefits.

These two latter provisions might significantly lower the unemployment rate in 2012, improving the president’s chances of winning a second term. The payroll tax provision would extend the payroll tax cut for employees through 2012 at its present rate of 4.2 percent on the first $110,000 of earnings, avoiding a return to its permanent rate of 6.2 percent. The tax was reduced effective in January, 2011 in an attempt to bolster take-home earnings and increase household spending.

Mr. Obama says that keeping the payroll tax at the lower level of 4.2 percent will create jobs, even though there’s little evidence that it did so in 2011.

Mr. Obama has threatened to veto the bill, yielding to pressure from his environmentalist base, because of the Keystone XL provision. House Republicans included it in the bill because the White House announced last month that a decision on the pipeline would not be made until after the November 2012 elections.

Mr. Obama, after huffing and hyperventilating, could work with the Democratic-controlled Senate to accept the House bill and then sign it. He would likely see the unemployment rate decline throughout 2012.

The application for Keystone XL was made in September 2008 by TransCanada Pipelines Ltd, a Canadian company. The 1,711 mile, 36-inch pipeline would carry crude from the oil-rich Lake Athabasca region of Alberta to Gulf Coast refineries. Because 1,384 miles were to be built in the United States, the application had to go to the State Department.

Even though the State Department gave the project a positive environmental assessment in August, last month it announced that no decision would be made before 2013, ostensibly to permit study of alternate routes through Nebraska.

That postponement was widely regarded as a ploy by the Obama administration to avoid offending Democratic-leaning environmentalists by approving the license before the November elections.

Sections of the Keystone pipeline that run from Alberta to Illinois and Oklahoma are already completed. If Mr. Obama signs the bill, he would allow construction to start on the section of the pipeline that brings oil all the way to the refineries in the Gulf of Mexico, creating many jobs. This would allow an additional 509,000 barrels per day, or a total of 1.1 million barrels per day, to flow from Canada to the Gulf.

For America, this is a very big deal. Not only would workers be employed in the construction of the last sections of the pipeline (around 13,000 directly, 7,000 indirectly), but our Gulf refineries would have an additional source of dense oil to refine. These jobs would pay well and the additional personal income would impart vigor to the U.S. economy, whose performance is now somewhere between anemic and lackluster.

With the capacity of Mexico and Venezuela to produce and ship crude oil to American Gulf coast refineries shrinking, the refiners would be willing buyers of the 1.1 million barrels a day of Canadian oil that would flow through the pipeline.

During construction, the pipeline was estimated to yield in the United States $99 million to local governments, $486 million to state governments, and about $5.3 billion in future, cumulative property taxes. The federal government’s share in tax revenue, assuming a rate of 15 percent, would be around $1.44 billion.

A second provision of the House bill that is distasteful to Mr. Obama would reduce maximum eligibility for unemployment benefits to 59 weeks from the present, extraordinary limit of 99 weeks. That would cause those of the long-term jobless who have been coasting to look for work sooner, and be less fussy about jobs they would accept.

The proposition that unemployment rises as eligibility for benefits lengthens is supported numerous economists, including Alan Krueger, the Princeton economics professor who this year became chairman of Mr. Obama’s Council of Economic Advisers.

The House bill would also make it more difficult to be eligible for benefits by requiring that applicants be actively seeking work or enrolled in a job-skills training program.

With these changes, I believe that unemployment rates could decline by at least an additional percentage point over the next year. It is difficult to evaluate the precise amount, because unemployment rates have never before been at 8 percent or higher for 34 months straight.

Of course, this reduction would not happen immediately, but the downward trend could begin in January and lower the unemployment rate. No president since Franklin Delano Roosevelt has been elected with an unemployment rate over 7.3 percent, so this might make a substantial difference to Mr. Obama’s reelection prospects.

Will Mr. Obama drop his objections to the House-passed bill? Or will he insist on his job-killing policies? Stay tuned.

This piece originally appeared in RealClearMarkets

This piece originally appeared in RealClearMarkets