Even if Congress succeeds in passing a fiscal deal, most employees will take home less money in 2013 because a temporary cut in payroll taxes is scheduled to expire Tuesday.
Congress has shown no interest in extending the 2 percent payroll tax cuts, according to the Tax Policy Center, a nonpartisan think tank in Washington.
“It’s going to hit everyone in the pocketbook,” said Larry Dunivan, a senior vice president at Ceridian Corp., one of the country’s largest payroll processors.
The Social Security payroll tax cut was passed in 2010 as a temporary measure to stimulate the economy. But neither the White House nor Republican leaders have fought hard in the current budget negotiations to keep the tax cut in place, in part because it costs $115 billion to $125 billion a year in revenue at a time when Washington is seeking to shrink the federal deficit.
In addition, AARP, the influential group representing older Americans, has urged lawmakers to abandon efforts to extend the tax cuts beyond 2012 as a way to help preserve funding for the Social Security system.
“It is not the type of policy that anybody supported as a permanent policy,” said Joseph Rosenberg, a research associate at the Tax Policy Center.
Barring any last-minute surprises, Social Security payroll taxes will climb back to 6.2 percent from 4.2 percent for 160 million Americans. Virtually the only exceptions are government workers in Massachusetts and some other states who contribute to a public pension fund in lieu of Social Security.
A household that earns $65,000 a year (close to the median in Massachusetts) will pay an additional $1,300 in taxes this year. And some dual-income couples with high-paying jobs could wind up spending up to $4,548 more on taxes. (The tax does not apply to earnings above $113,700 per worker.)
“People will spend less, and it will hurt our economy,” said Lorraine Scally, a
Investment bank JP Morgan Chase predicted the higher payroll taxes will cut consumer spending by as much as $100 billion this year, curbing economic growth. IHS Global Insight, the Lexington economic forecasting firm, projects the tax increase will shave four-10ths of a point off the economic growth rate next year.
“It’s significant,” said Nigel Gault of IHS. “Spending is weaker, and you’ll get fewer jobs.”
Gault said the pay cut alone probably won’t be big enough to nudge the country back into recession — but that could happen if Congress and the president can’t find a way to prevent Bush-era tax cuts from expiring and to moderate deep, automatic budget cuts that take effect at the same time. Most economists would prefer the government find a more gradual way to cut the deficit to allow the economy to strengthen.
Some workers were untroubled by the increase, figuring the money would help pay for their eventual retirement benefits.
“I don’t mind paying for Social Security,’’ said Sarah Kelly, 34, a Boston paralegal. “I am hoping it comes back to me at some point.”
Others said they will simply have to find a way to cope, whether it’s working more or cutting back on spending.
“Obviously, we will have less money to buy something,” said Milan Rajbhandari, 37, who works in a seafood restaurant in Boston.
Not everyone noticed the tax cut in the first place. Because many workers are paid weekly or biweekly, the tax cut was spread out over the course of a year, instead of arriving in a single refund check (as it did under President George W. Bush a decade ago).
But James Bacik, who works in financial services, said he and his wife pay special attention because she is self-employed, so they have to calculate the payroll taxes themselves and mail the IRS a hefty check each quarter for three months’ worth of taxes, instead of having it automatically deducted every week. Bacik, 37, of Swampscott, said he and his wife expect to pay an additional $4,500 in payroll taxes this year.
“It’s a little different when you’re actually writing out the check,” Bacik said. “That extra 2 percent kills us.”