The Free Press, Mankato, MN

Local News

January 3, 2013

Attempt to pump up economy may deflate household budgets

— The holidays are over, including the one on your paychecks. Chalk that up to the fiscal cliff deal.

Area wage earners will be among 160 million Americans taking a 2 percent payroll tax hit in 2013 after Congress declined to extend the “payroll tax holiday” in effect the past two years.

As a result, Americans this week are seeing a tax on their paychecks rise from 4.2 percent to 6.2 percent.

Although the increase will pump more money into a debt-wracked  government that was losing $120 billion a year with the lower tax rate, economists say the move could strip the economy of $115 billion in disposable income this year as people, particularly in the lower-income brackets, cut back on spending.

The tax increase figures to hit hardest those living check to check who can ill afford the 2 percent setback.

“Obviously, the less you make, the more it’s going to hurt,” said Mankato accountant Alex Swanson.

He said the pinch will be sharper for those who haven’t received yearly cost-of-living raises that help mitigate effects of the higher tax.

The 2 percent hike means that a person earning $30,000 will receive nearly $600 less this year, someone making $50,000 will receive about  $1,000 less, and someone earning $113,000 will take a $2,200 hit.

The payroll tax funds Social Security. The pay-in percentage was lowered a couple of years ago as an economic stimulus measure aimed at freeing up more spending money for Americans.

Although reversion of the payroll tax to pre-2010 levels was not unexpected, it’s likely that most workers didn’t have that on their radar.

Many employers have or will take steps to give employees a heads-up prior to the “surprise” in their first 2013 paychecks.

“We’ve talked to some employees, but not all of them. We’ve just been waiting to see what would happen,” said Lee Masters, accountant for Agristrand, a 48-employee Mankato building materials manufacturer.

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