Payroll Taxes 2013: Thanks to Congress, Your Taxes Will Spike Next Year

Your taxes will be going up next year, whether or not we dive off the fiscal cliff. An extension of the payroll tax cuts is no longer on the agenda as lawmakers approach the deadline for a deficit reduction package expected no later than January 1.

Passed in 2010, the lower rate was proposed as temporary alleviation for an ailing economy and as a way to prop up faltering demand, lowering the employee contribution to 4.2% from its previous rate of 6.2%. The White House proposed an extension of the cuts in previous negotiations regarding the now-impending fiscal cliff, but withdrew that proposal after heavy Republican opposition.

Paul Krugman calls ending the payroll tax cut extension a “fairly big dose of austerity.” That description seems somewhat accurate. For a family making roughly $50,000 a year, that translates to somewhere in the neighborhood of $20 a week. The Wall Street Journal estimates the total financial impact to be about $1,000 a year for the average American family. Families making up to $110,000 would see an increase of about $2,200. IHS Global says removing the tax cut extension would cost growth in the neighborhood of a half-percentage point next year.

Marketplace.org reports:

Few lawmakers have brought attention to the expiration of the cuts; as Nigel Gault, top U.S. economist at IHS says, “They certainly weren’t too keen about publicizing that a lot of money was going to disappear … it will be a surprise to a lot of people that they’ll have less to spend and they’ll have to adjust.”

Two in 5, or 38% of household decision-makers now say they live paycheck-to-paycheck, with some studies estimating that number even higher. The payroll tax cut disproportionately affects lower and middle income Americans. Removing these cuts will likely be a drag on growth as $100 billion in stimulus leaves the economy.

However, it is important to note that the cuts were intended to be temporary, and could be offset by increased economic growth in 2013. Joseph Rosenberg, a research associate at the Urban/Brookings Tax Policy Center, said that if the payroll tax cuts expired in conjunction with an extension of the Bush tax cuts for those making under $250,000 a year, it is “not likely to have a significant economic impact.”