Cutting taxes for middle-class families with kids is a noble pursuit for conservatives. The Washington Examiner, in an editorial (“Cut Taxes for the 47 percent,” Dec. 27, 2016) proposed one way to reduce the burden on families who face a small or no income tax liability: creating an a exemption to the payroll tax. Working- and middle-class breadwinners would be able to earn a certain amount of wages without having to pay Social Security and Medicare payroll tax (known as “FICA”). This FICA exemption would grow progressively larger with family size.

Would this work? Is it good tax reform? Does it fit with conservative ideas?

To count as tax reform, any tax cut should make the tax code more family-friendly and simpler to comply with. So Congress shouldn’t simply staple a payroll-tax exclusion to the tax code. Rather it should replace existing tax breaks for middle-class working families. Income tax preferences like the dependent exemption, the head of household status, the child tax credit, the child care credit and family-related refundable credits could all be replaced by a much simpler payroll tax exemption handled by their employers and payroll companies. Certainly this consolidation could go beyond mere replacement to actually cut taxes for the middle class families in question.

The payroll tax exemption idea does have some landmines.

The biggest danger is that people may double- and triple-dip the benefit. If (say) the first $25,000 of wages is exempted, what happens when someone changes jobs late in the year? They might have $25,000 exempted from their first job, and the new employer may start the exemption clock again from dollar one on their second (and third, and fourth) job. Much more than $25,000 would actually have faced no FICA taxation instead of just the first $25,000.

A related problem is what happens when someone fails to claim their FICA exemption, or claims too little based on family size. There has to be some way to reconcile the FICA exemption due a taxpayer and the actual FICA exemption claimed.

The easiest way to true-up the benefit is by a supplementary calculation on the family’s 1040 income tax form. The tax form would calculate the actual FICA exemption benefit they should have had, and then either credits the taxpayer for what is missing, or imposes a surtax on the taxpayer for what was over-claimed. This is very similar to the process for what happens in Obamacare with advance tax credits in healthcare exchanges.

Payroll companies would have to be brought in early in the process of this policy change. It is they, along with employers, who will bear the brunt of compliance here. Their software systems will have to be updated early enough to cope with such a drastic change to what has been a straightforward, flat FICA tax arrangement for most. A few years back, payroll companies pulled their hair out over a payroll tax reduction regime in various iterations, collectively known as “Making Work Pay.” Those mistakes need to be avoided again.

Employers should be able to benefit equally from the FICA exemption. If, for example, a worker’s first $25,000 is excluded from FICA tax, it should be excluded from the entire FICA tax—not just the half explicitly paid by employees. That way, employers have an incentive to hire workers exiting welfare, and those with lesser skills. The self-employed can’t be forgotten about here. Sole proprietors pay both halves of FICA (the so-called self-employment tax) and they ought to be able to get an equivalent benefit as wage earners.

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What about those who are married and have a non-working, stay at home spouse? Would a FICA exemption have an unintentional effect of creating a marriage penalty that biases in favor of two working spouses (as each would have an exemption claim) and against a homemaker without a W-2?

None of the above considerations is to suggest that a FICA exemption for working families with children is a bad idea. It is to suggest that the idea is fairly complicated to implement. Policymakers looking to deliver tax relief to America’s working class should weigh the plusses and minuses of a FICA exemption over and against its main competitor, a larger child tax credit. The most important consideration is how one proposal or the other (or a mixture of both?) fits into 2017’s round of comprehensive tax reform.

Ryan Ellis is tax policy director for the Conservative Reform Network. Thinking of submitting an op-ed to the Washington Examiner? Be sure to read our guidelines on submissions.

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