The proposal to extend the Bush-era tax breaks unveiled by Mr. Obama this week would offer a tax cut for most Americans. The deal would end the Making Work Pay credit, which gave a tax reduction of up to $400 to workers with low and middle incomes. That credit will be replaced by a 2 percent decrease in the payroll tax for Social Security for people of all incomes.
But more than six million federal, state and local government employees do not pay into Social Security at all. Instead, they pay into public pension systems. So if the agreed proposal becomes law, such employees will lose the $400 credit and would not reap any benefit from the payroll tax cut.
According to the most recent statistics by the House Ways and Means Committee, more than 174 million workers paid into Social Security in 2007, but about 5.7 million state and local government employees paid into other pension systems. While the federal government has been moving its work force into Social Security in recent decades, there were still 600,000 employees excluded from it in 2007.
Some tax experts say that it is unfair for a $900 billion tax cut package to give a quarter of its benefits to the top 1 percent of wage earners while forcing public sector workers, who are largely middle class, to have to pay more.
“It makes so little sense that you have to hope that the people who negotiated this didn’t think it through,” said Robert McIntyre, director of Citizens for Tax Justice, a public interest group aligned with unions. “And when they do think it through, they’ll realize it’s not fair. It would be cruel not to do something about it.”
Amy Brundage, a White House spokeswoman, acknowledged that the current version of the plan could result in a higher tax bill in 2011 than 2010 for some government workers. But she stressed that the plan would nonetheless spare them, and all taxpayers, a much steeper increase that would have resulted if no deal had been struck and all the Bush tax cuts were allowed to expire on Dec. 31.
While Mr. Obama had proposed an extension of the Making Work Pay credit, the $120 billion payroll tax reduction worked out is twice as large and will offer a break of up to $2,136 each to millions of middle- and high-income taxpayers.
“The payroll tax cut would reduce taxes for over 155 million workers, providing effective tax relief that will create jobs and boost the economy,” Ms. Brundage said.
While many Democrats have criticized Mr. Obama for abandoning a campaign pledge to let the cuts expire on the wealthiest 2 percent of wage earners, Ms. Brundage said that the president did so only after winning the extension of an assortment of credits for low-income Americans and a 13-month extension of unemployment benefits.
“The cumulative impact of these provisions will be good for America’s working families and our economy,” Ms. Brundage said.
Leaders of the American Federation of State, County and Municipal Employees were muted in their reaction to the prospect of more taxes for public employees.
The union spent $90 million to help elect Democrats during the last election cycle, when Mr. Obama promoted a plan to preserve tax cuts for all but the wealthiest 2 percent of Americans. But Democratic leaders in Congress declined to vote on the measure before the elections and, after Republicans won control of the House, could not win approval for it during the lame duck session of Congress.
“We are aware of it,” said Gregory King, a union spokesman, “and we are discussing it with the appropriate leaders in Congress.”