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Published: Thursday, 1/3/2013 - Updated: 1 year ago

With 'fiscal cliff' deal Social Security tax holiday to end, cutting into paychecks

BY TYREL LINKHORN
BLADE BUSINESS WRITER

It took an uncomfortable amount of time, but Congress finally found its footing on the edge of the fiscal cliff, passing an 11th-hour measure that preserves the Bush-era tax cuts for nearly all Americans.

In spite of that, most people will still see less take-home pay in 2013.

The package, which President Obama signed today, kept income tax rates the same for anyone making less than $400,000, but the deal did not extend the temporary cut to Social Security taxes workers have enjoyed over the last two years.

“Relative to what [taxes] they were paying for 2012, their paychecks will be smaller,” said Roberton Williams, a senior fellow at the Tax Policy Center. “The perspective I think is more valid is not that taxes have gone up for them, but they got a break for the last few years.”

At Mr. Obama’s urging, Congress passed a temporary measure in 2010 to reduce the rate workers pay into Social Security from 6.2 percent to 4.2 percent. Though never meant to be permanent, the cut was extended twice to last through the end of 2012.

For 2013, the rate workers pay toward Social Security reverts back to 6.2 percent. That means someone earning $50,000 will pay $1,000 more in Social Security taxes this year than they did last year. In that scenario, the increase works out to about $20 a week.

Experts say the effects will be seen immediately.

“Everybody’s known it was coming,” Mr. Williams said. “I’m sure every payroll-processing firm in the country has taken account of that and the very first paycheck for work done in 2013 will be smaller.”

Christopher Davis, owner of Buckeye Payroll Services in Sylvania Township, said his firm made the decision last week to begin processing payrolls for 2013 under the assumption the payroll tax holiday wouldn’t be extended.

And although the end of the tax holiday isn’t a surprise and technically might not be a tax increase, it sure looks like one to workers.

“When this went into effect my philosophy was people are going to get used to it, and when it goes away it’s going to seem like a tax increase, and that’s what people are saying to me,” Mr. Davis said.

Pitched by President Obama as an economic stimulus, the payroll tax holiday pumped about $120 billion a year into the economy by giving workers a small boost in take-home pay. The Social Security Trust Fund wasn’t affected by the cut, because the government funneled enough general fund money into the trust to make up the difference.

How successful it was as a stimulus is difficult to determine. “It did have a positive impact, but it’s hard to say where the economy would have been without it,” said Gbenga Ajilore, an associate professor of economics at the University of Toledo.

Though doing away with the temporary cut could slow economic growth somewhat and won’t make workers happy, Mr. Ajilore said the United States’ burgeoning debt is a bigger problem.

“The question is, are you willing to give up $40 a week so we don’t end up like Greece in 10 years, where we have serious austerity and start slashing benefits?” he said.

Contact Tyrel Linkhorn at: tlinkhorn@theblade.com or 419-724-6134.



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