'Fiscal cliff' deal didn't block payroll tax increase

2 pct. hike will hit nearly 77 pct. of households

WASHINGTON - Despite what you've heard about Washington's 11th hour heroics to keep your taxes from increasing, well -- they're going up.

They've done it already. You'll see it in your next paycheck.

Even as Congress and the White House officials struck a short-term deal to avert financial disaster by keeping income tax increases and spending cuts from taking effect, lawmakers silently allowed payroll taxes for 120 million working American families to jump 2 percentage points, beginning this month.

That hike will hit nearly 77 percent of American households, beginning Jan. 1 and costing families an extra $942 on average per year, even as the dicey economy has many workers living paycheck to paycheck.

Experts also expect the economy to suffer because consumers, the main drivers of the economic recovery, will have less money to spend.

For a family earning $50,000 annually, the tax hike translates to $20 a week less in take-home pay, said Joe Rosenberg, a research associate at the Tax Policy Center, a nonpartisan Washington think tank.

"That doesn't sound like a huge sum of money," he said. "But for a lot of households, it's a significant amount."

As lawmakers worked to avert the fiscal cliff, neither party made an effort to prevent the payroll taxes from rising.

On Tuesday, the House passed a short-term deal that extends expiring income tax breaks for families earning below $450,000 annually and gives lawmakers two more months to strike a deal on spending cuts before deep reductions kick in.

An all-but-certain round of fighting is set to begin to determine which federal programs will be slashed. Another fight looms over raising the debt ceiling, essentially the government's self-imposed credit-card limit.

In reaching an agreement this week, lawmakers said nothing about the increase in the payroll tax, which partly funds Social Security. Instead, they focused on the fiscal cliff's impact on income taxes.

The payroll levy had been reduced from 6.2 percent to 4.2 percent since the Obama administration offered it in 2010 to help kick-start the economy by providing workers with more take-home pay.

The temporary measure was extended through last year, at an annual cost of $115 billion a year in lost funding to the Social Security Trust Fund. Now it will revert to 6.2 percent.

Social Security's financial health wasn't affected by the payroll tax cut, because the lost revenue was ultimately paid for by the government's general funds, Rosenberg said.

The tax applies on an employee's first $113,700 of income, according to the Social Security Administration. Self-employed workers will similarly see payroll taxes increase by 2 percentage points, from 10.4 percent to 12.4 percent up to the same income limit.

Despite vows by the White House and Democrats and Republicans in Congress to shield middle-class Americans from an added income tax burden, the payroll tax increase apparently was accepted by the dueling sides without fanfare.

What's notable is that the hike came despite Washington's bluster about not raising taxes -- on anyone, in the case of Republicans, or on the middle class, as has been Democrats' rallying cry. But the sides were careful to specify income taxes as the object of their distaste.

Economists and policy groups have, for months, been arguing the merits of extending the reduced payroll tax. However, it fell on deaf ears. There is little evidence House Republicans or the White House championed an extension.

Why didn't the White House contest the increase? In short, the politics didn't work. Democrats for years have preferred tax breaks more concentrated on helping the poor, Rosenberg said. Also, even though the tax break was paid for by general government revenue, the program still appeared -- to many -- to be depleting Social Security's coffers.

The tax hike isn't just a blow to working families. It will also be a shock to the economy. Economists have considered the payroll break one of the more effective ways of stimulating the economy because, as working families enjoy larger take home pay, they have had more money to spend. That, in turn, has helped boost businesses' bottom lines and spur the fragile economic recovery.

But now, the opposite is expected to happen.

In an estimate to clients, Goldman Sach's chief economist Jan Hatzius said the payroll tax hike could shave 0.6 percent from the nation's Gross Domestic Product.

Rosenberg said he thinks it's too early to tell exactly how much the higher payroll tax will hurt the economy, but he generally agrees that there will be a negative effect.

(Reach Scripps Howard News Service reporter Isaac Wolf at wolfi@shns.com.)

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