Taxes rising for most people despite fiscal deal
Posted January 2, 2013
WASHINGTON — While the tax package that Congress passed New Year's Day will protect 99 percent of Americans from an income tax increase, most of them will still end up paying more federal taxes in 2013.
That's because the legislation did nothing to prevent a temporary reduction in the Social Security payroll tax from expiring. In 2012, that cut in the payroll tax – from 6.2 percent to 4.2 percent – was worth about $1,000 to a worker making $50,000 a year.
The Tax Policy Center, a nonpartisan Washington research group, estimates that 77 percent of American households will face higher federal taxes in 2013 under the agreement negotiated between President Barack Obama and Senate Republicans. High-income families will feel the biggest tax increases, but many middle- and low-income families will pay higher taxes too.
Households making between $40,000 and $50,000 will face an average tax increase of $579 in 2013, according to the Tax Policy Center's analysis. Households making between $50,000 and $75,000 will face an average tax increase of $822.
"For most people, it's just the payroll tax," said Roberton Williams, a senior fellow at the Tax Policy Center.
The news of higher taxes came as a jolt Wednesday to customers at Rude Awakening, a Fayetteville coffee shop.
"Middle-class Americans (who) struggle to get to this middle-class level have now just been plunged again," said Marcia Staples, 49, a mortgage loan officer and single mother. “That’s outrageous. ... and what are we to do? That’s what I’d like to know, government, what are we to do?
"I work in banking, and I talk to people all the time," Staples said. "Finances are the biggest issue with the middle class and below."
For some, however, the news of higher taxes wasn't so hard to swallow.
"We have to make the sacrifice. All in this life is not easy," said Diana Wilson, 42, a cook and the daughter of Peruvian immigrants. "We have to sacrifice something, and I think all of our citizens ... need to do something for this country."
The tax increases could be a lot higher. A huge package of tax cuts first enacted under President George W. Bush was scheduled to expire Tuesday as part of the "fiscal cliff." The Bush-era tax cuts lowered taxes for families at every income level, reduced investment taxes and the estate tax, and enhanced a number of tax credits, including a $1,000-per-child credit.
The package passed Tuesday by the Senate and House extends most the Bush-era tax cuts for individuals making less than $400,000 and married couples making less than $450,000.
Obama said the deal "protects 98 percent of Americans and 97 percent of small business owners from a middle-class tax hike. While neither Democrats nor Republicans got everything they wanted, this agreement is the right thing to do for our country."
The income threshold covers more than 99 percent of all households, exceeding Obama's claim, according to the Tax Policy Center. However, the increase in payroll taxes will hit nearly every wage earner.
Social Security is financed by a 12.4 percent tax on wages up to $113,700, with employers paying half and workers paying the other half. Obama and Congress reduced the share paid by workers by 2 percentage points for 2011 and 2012 to encourage consumers to spend more and perk up the sagging economy.
Obama pushed hard to enact the payroll tax cut for 2011 and to extend it through 2012, but it was never fully embraced by either party, and this time around, there was general agreement to let it expire.
"If you don't have any extra money, I'm not making any money," said John Thompson, 44, who owns a tattoo parlor. "I'm a luxury item. If you don't have expendable cash, you're not getting my product."
Barbara Sizemore, 65, who works part time at a nursing home, said the payroll tax bit might force her to limit her trips to Rude Awakening for coffee.
"Our food prices are going up. I mean, on top of that, it leaves you with less money to spend," Sizemore said. “Instead of raising taxes, we should cut entitlements.”
The new tax package would increase the income tax rate from 35 percent to 39.6 percent on income above $400,000 for individuals and $450,000 for married couples. Investment taxes would increase for people who fall in the new top tax bracket.
High-income families will also pay higher taxes this year as part of Obama's 2010 health care law. As part of that law, a new 3.8 percent tax is being imposed on investment income for individuals making more than $200,000 a year and couples making more than $250,000.
Together, the new tax package and Obama's health care law will produce significant tax increases for many high-income families.
For 2013, households making between $500,000 and $1 million would get an average tax increase of $14,812, according to the Tax Policy Center analysis. Households making more than $1 million would get an average tax increase of $170,341.
"If you're rich, you're almost certain to get a big tax increase," Williams said.