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January 4, 2013

Payroll tax hike may deflate some household budgets

MANKATO, Minn. —  

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

About 160 million Americans will take 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  Alex Swanson, an accountant in Minnesota.

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.

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 building materials manufacturer in Mankato.

 “For people living on tight margins even a small $25-$50 change can have a big effect. It’s a serious concern for our community,” said Phil Claussen, director of Blue Earth County Human Services in Mankato.

 

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Details for this story were provided by Brian Opanja, a reporter for The Free Press in Mankato, Minn.

 

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