Regardless of who wins the presidential election in November or what compromises Congress strikes to keep the economy from automatic tax increases and spending cuts, 160 million American wage earners will probably see their tax bills jump after Jan. 1.
That is when the temporary payroll tax holiday ends. Its expiration means less income in families’ pocketbooks — the tax increase would be about $95 billion in 2013 alone — at a time when the economy is little better than it was when the White House reached a deal on the tax break last year.
Independent analysts say that the expiration of the tax cut could shave as much as a percentage point off economic output in 2013, and cost the economy as many as 1 million jobs. That is because the typical American family had $1,000 in additional income from the lower tax.
But there is still little desire to make an extension part of the negotiations that are under way to avert the huge tax increases and across-the-board spending cuts, known as the fiscal cliff, that will start in January without a deal. For example, without any action, the Bush-era tax cuts will expire and the military and other domestic spending programs will be reduced.
“This has to be a temporary tax cut,” Treasury Secretary Timothy Geithner said, testifying before the Senate Budget Committee this year and voicing the view of many in the White House and on Capitol Hill. “I don’t see any reason to consider supporting its extension.”
The White House has not pushed for an extension.
“We’ll evaluate the question of whether we need to extend it at the end of the year when we’re looking at a whole range of issues,” Jay Carney, the White House press secretary, told reporters recently.
The original point of the payroll tax holiday was to stimulate consumer spending and aid middle-income households. But now Congress needs the money as it struggles with vast deficits and believes the economy can withstand the expiration.
Many Republicans vehemently opposed its passage last year, as it would divert money from the Social Security program. Many Democrats fervently supported it last year but show no such enthusiasm now. Nancy Pelosi of California, the top House Democrat, has told reporters she thinks it should expire.
Support is lacking for two main reasons. First, both Democrats and Republicans would rather focus on the broader political and economic issue of the fate of the Bush-era income tax cuts. These cuts, too, were initially meant to be temporary, but are now deeply entrenched in the tax code and central to the budget battle.
Second, though the economy has not become significantly stronger over the past year and the tax increases in addition to spending cuts coming next year could push the country into a recession, independent economists say that the economy could shoulder the payroll tax increase without undue harm.
Moody’s Analytics, for instance, estimates that expiration of the payroll tax holiday would shave 0.6 percentage point off economic growth, adjusted for inflation, in 2013 — and that the economy could safely stomach government spending cuts and tax increases totaling up to 1.5 percentage points of economic output.
Still, expiration of the payroll tax cut will increase the taxes of millions of middle-class families.
The fragile state of the recovery and the frustratingly slow growth of the economy have heightened the stakes for the end-of-year negotiations. Economists estimate that if Congress fails to forestall or unwind the spending cuts and tax increases due to take effect next year, the hit could send the country back into recession.
The Federal Reserve currently estimates that the economy will grow 2.5 to 3 percent next year, and that the unemployment rate will be 7.6 to 7.9 percent, still painfully high.
Some economists have pushed for an extension of the payroll tax holiday to help support the recovery — or for its replacement with other measures to help the millions of low-income working families whose taxes will rise when it expires.
The Economic Policy Institute, a liberal Washington-based research group, for instance, has said that the payroll tax cut has a stronger stimulative effect on the economy than many other tax cuts because the working households that receive it tend to spend the money rather than save it.
Thus, it estimates that the tax cut’s expiration could erase 0.9 percent of economic output and put up to a million jobs at risk.
It recommends replacing the payroll tax cut with infrastructure spending or fiscal aid to states, as a form of support for the recovery in the short term that would not have harmful long-term budget effects.
Some conservative economists have pressed for its extension as well, arguing that no Americans should have their taxes go up next year.
“Obama and Congress both need to hear this alarm clock, wake up and get busy avoiding a payroll tax hike insult to the middle class’ injuries of stagnant wages and high unemployment,” wrote J.D. Foster, a fiscal specialist at the right-of-center Heritage Foundation.
The payroll tax holiday this year has reduced workers’ tax on wages up to $110,100 to 4.2 percent from 6.2 percent. In 2012 that translated into a $700 tax cut for a person making $35,000 a year and a $2,202 tax cut for workers making $110,100 and up.
Last winter, the White House pushed a resistant Congress hard for an extension, arguing it was needed to support the flagging recovery.
The White House set up a campaign for Americans to send in stories about what they would do with the extra $40 in their paychecks, and denounced Republicans as not wanting to aid the middle class.
“For the typical American family, it is a big deal. It means $40 extra in their paycheck. And that $40 helps to pay the rent, the groceries, the rising cost of gas,” President Barack Obama said.