Restored payroll tax pinches those with smallest checks

Feb 8th, 2013
by Nelson D. Schwartz

To read this article in the News & Observer, click here.

this story.

Jack Andrews and his wife no longer enjoy what they call date night, their once-a-month outing to the movies and a steak dinner in Augusta, Ga. And in Harlem, Eddie Phillips’ life insurance payment will have to wait a few more weeks.

Like millions of other Americans, they are feeling the bite from the sharp increase in payroll taxes that took effect at the beginning of January. There are growing signs that the broader economy is suffering, too.

Chain-store sales have weakened over the course of the month. And two surveys released last week suggested that consumer confidence was eroding, especially among lower-income Americans.

While these data points are preliminary at street level, the pain from the expiration of a 2 percentage point break in Social Security taxes in 2011 and 2012 is plain to see.

“You got to stretch what you got,” said Phillips, 51, who earned $22,000 last year. “That little $20 or $30 affects you, especially if you’re just making enough money to stay above water.” “I’m playing catch-up each month,” he said.

Jack Andrews has it slightly better. He earns a bit more than $40,000 a year, but because his wife, Cindy, is disabled, he is the sole breadwinner. Something had to give now that he is earning about $800 less a year, or $66 a month, and it was the couple’s monthly night out.

The tax break, which was pushed by the White House to stimulate spending in 2011 and extended in 2012, was always supposed to be temporary. But with pressure building in Washington to reduce the deficit and politicians fighting bitterly over whether to raise taxes on the very rich, the question of how the increase in Social Security taxes would affect the poorest workers did not garner much debate on either side of the aisle.

The higher rate applies to all earned income up to $113,700. For a household earning $100,000 a year, the increase means an additional $2,000 a year in payroll deductions. Economists estimate the payroll tax increase will reduce disposable income by about $120 billion and shave half a percentage point from economic growth in the first quarter – a significant blow given that the economy is expected to expand only 1 to 2 percent in the first half of 2013.

“If you wanted to design a policy to squeeze the spending of lower- and middle-income households, raising the payroll tax is the way to do it,” said Ian Shepherdson, chief economist at Pantheon Macroeconomic Advisors.

Monthly data for chain-store sales in January will not be released until Friday, but the weekly data already available for last month showed a steady deterioration in shopping activity.

“There is something going on,” said Chris G. Christopher Jr., senior principal economist at IHS Global Insight. “The payroll tax seems to be cutting into things.”

That pattern was apparent in a Thomson Reuters/University of Michigan survey of consumer sentiment released last Friday, according to Richard T. Curtin, who directs surveys of consumers at the university.

When asked how their financial situation had changed in January, 32 percent of people with incomes below $75,000 said their pay had dropped, compared with 13 percent who said it had increased. By contrast, 38 percent of people earning more than $75,000 said their wages had gone up last month, and 23 percent said they had gone down.

“We rarely see such divergent trends,” Curtin said. “Mostly it was the payroll tax hurting the lower incomes, while higher-income folks had a boost from things like dividends.”

In fact, as companies paid out dividends to shareholders early to avoid the higher tax rate for 2013, personal dividend income increased at a seasonally adjusted monthly rate of 34.3 percent in December, compared with a 4.5 percent rise in November.

But that did little to help Jessica Price, who holds down two jobs in Orlando. Most weekends she works at a clothing store in a shopping center near the Universal Studios theme park, within sight of the roller coasters, and she spends weekdays collecting tolls on a local expressway.

Price, 20, whose annual income is $15,000 to $16,000, prefers shopping at Whole Foods, the upscale supermarket chain, which is healthier but more expensive. But since the payroll tax went up, she has been going more often to Publix and Wal-Mart.

“The food that has a lot of fat and food coloring is cheaper,” she said. “It’s a lot more expensive to eat healthier. But now I’m actually looking at the price tag on things rather than grabbing them.”

Read more here: