Payroll tax cuts for employees are set to expire on December 31 unless Congress can agree to extend, and potentially expand, the tax break. But given the number of disappointments Congress has dished out in the last year, the likelihood of agreeing on anything as important as tax cuts may be a (small-f) fool's hope.
Congressional debates
Officials are off, however, to a decent start. Congressional Democrats are united in support for the payroll tax cut to prevent a tax increase for the middle class in 2012. They will put pressure on Republican house leaders to reach a deal on the extensions before the break expires, reports Bloomberg.
House Speaker John Boehner said of the GOP party, "I feel confident in our ability to move ahead" with the payroll tax cut legislation. The GOP however, wants to couple the continuation of the tax cut with a provision that assures construction of an oil pipeline from Canada to Texas.
President Obama said he would reject any effort to tie extension of the tax cut to accelerate approval of the pipeline. He adds that the tax cuts "shouldn't be held hostage" by another issue.
Here are some key data points about the payroll tax:
- The 12.4% payroll tax that funds Social Security is evenly split between employers and employees.
- The portion paid by workers was lowered to 4.2% in 2011 as the employer portion remained at 6.2%.
- Unless Congress acts, workers in 2012 would again face a payroll tax of 6.2% of their wages up to $110,100.
President Obama is proposing:
- A one-year extension and expansion of the tax holiday already in place.
- For the employee portion of the payroll tax: Cut it to 3.1% from the 2011 rate of 4.2%.
- For the employer portion of the payroll tax: Cut it to 3.1% from the 6.2% on the first $5 million of payroll next year.
- A complete employer payroll tax holiday for companies that grow their payrolls up to $50 million in a year by hiring new workers or raising the salaries of existing workers.
Investing ideas
Foreseeably, these tax cuts benefit the lower and middle classes. For example, cuts will put $2,170 next year in the pockets of married couple filing jointly with $70,000 in gross income, according to White House estimates.
When the middle and lower classes have tax breaks, most of the money will likely be spent, putting the dollars back into the system. This is good news for the economy, and good news for consumer goods companies because they are first in line to benefit from increased spending.
So we were wondering, if Congress agrees to expand the cut, which companies could benefit most? To find out we compiled a universe of U.S. consumer goods companies with strong dividends-yields above 2% and payout ratios below 50%.
We then collected profitability data and identified the final list of companies that have reported higher than average profit margins over the trailing 12 months (TTM).
Do you think these names will benefit from a resolution? (Click here to access free, interactive tools to analyze these ideas.)
1. Colgate-Palmolive
2. General Mills
3. Hasbro
4. Hershey
5. Kellogg Company
6. The Coca-Cola Company
7. McCormick & Co.
8. Packaging Corp. of America
9. Sealed Air
10. The J. M. Smucker Company
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.
Kapitall's Rebecca Lipman does not own any of the shares mentioned above. Profitability data sourced from Fidelity. All other data sourced from Finviz.