Payroll tax cut means thousands in savings for Mass. workers
Congress has temporarily extended a contentious payroll tax cut that means significant savings for Bay State workers, but another battle looms in early 2012 on whether to keep the cut in place all year.
After weeks of debate, Congress continued the tax cut through February next year, avoiding a Dec. 31 expiration date. But Democrats and Republicans still disagree on how to pay for a full-year extension.
The temporary cut to Social Security taxes withheld from paychecks will yield about $1,290 in savings by the end of 2011 for a worker earning the state’s median household income of $64,500.
A worker earning the median household income of $34,236 in Fall River would save $685 by the end of this year. In Newton, Sudbury, Duxbury and 32 other wealthier suburbs, workers with median incomes upward of $106,800 qualify for the maximum cut – $2,136.
Massachusetts congressional representatives said extending the tax break all year is necessary to avoid raising taxes as the economy remains fragile.
“If we don’t extend it at least as it currently is … about 160 million Americans will see an extra $1,500 taken out of their payroll taxes,” said U.S. Rep. Niki Tsongas, D-5th.
Several Bay State economists and researchers agreed the tax cut should stay throughout 2012.
“The extension of the payroll tax holiday is critical because it helps free up some resources among the middle class, who are still very heavily burdened by massive debt,” said Christian Weller, an economist and public policy professor at UMass-Boston and a senior fellow at the Center for American Progress.
Both parties still have competing ideas on how to pay for the tax cut.
House GOP leaders wanted to tie a full-year extension to reduced unemployment benefits, approval of an oil pipeline from Canada and several other matters Democrats opposed. Democrats wanted to pay for the tax cut with a surtax on millionaires, a non-starter with Republicans.
So the Senate passed only a two-month extension. After initially opposing that idea, the House GOP bowed to political pressure and passed the measure Dec. 23.
Bay State representatives roundly slammed Republican ideas for paying for the tax cut extension.
“Putting the pipeline in, which is totally unrelated, is the worst example of chicanery,” said U.S. Rep. Barney Frank, D-4th.
All criticized the idea of cutting unemployment benefits.
“We need to extend the payroll tax benefit for the people lucky enough to have a job while still preserving unemployment insurance for our countless friends and neighbors looking for work,” U.S. Rep. William Keating, D-10th, in a written statement.
But they showed some willingness to compromise. Most Bay State representatives said they would have supported the millionaires’ surtax, but were willing to take it off the table if it means passing an extension.
However, Tsongas and other representatives said they had yet to see other ideas to fund the tax cut that they could support.
U.S. Rep. Stephen Lynch, D-9th, said a steady, reliable source of funding should replace Social Security revenue lost in the tax cut. This year, the government made up the loss through borrowing.
“We’re really flirting with disaster here if we continue to divert money away from Social Security,” Lynch said.
Rep. Michael Capuano, D-8th, also voiced worries about Social Security. At the same time, he said the payroll tax cut is likely helpful for people struggling to make ends meet.
“I’m for extending it if it can be done in the right way,” he said.
Based on median household incomes, the weekly savings from the tax cut in Massachusetts range from about $12 to $41.
Employees likely put that money toward expenses or paying down debt, rather than saving it, researchers said.
“There’s some evidence that suggests it’s one of those pieces of stimulus that quickly becomes consumption,” the desired effect, said Stephen Poftak, research director for the conservative Pioneer Institute.
However, Poftak said reducing funding to Social Security over the long term without addressing the loss would be fiscally irresponsible.
Weller said the tax cut mainly helps the middle class to pay down debt, which ultimately could signal to businesses they have more to spend, spurring hiring and growth.
“The longer households are worried about their debt, they’re not going to be consuming as much,” he said.
Savings from the payroll tax cut are significant for the average worker, and failing to extend it could have a “significant impact” on the economy, said Alan Clayton-Matthews, a professor at Northeastern University’s School of Public Policy and Urban Affairs.
“The stimulus is needed,” he said. “How we get it is not as important as the need for it.”
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