Payroll tax cut means thousands in savings for Mass. workers

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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.”

Also seen in Wicked Local: Brookline.