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Expect smaller paychecks after payroll tax cut lapses

Published: Wednesday, January 2, 2013 at 6:47 p.m.
Last Modified: Thursday, January 3, 2013 at 7:08 a.m.

The holidays indeed are over, including one that lasted for two years and boosted the typical Sonoma County household's income by about $1,200 a year.

While the tax consequences of plunging over the "fiscal cliff" would have been far greater, a 2 percent increase in the employee's share of the Social Security payroll tax -- effective now -- restores the total tax rate to 6.4 percent, where it was in 2010 before the tax holiday cut it to 4.2 percent.

The increase will divert about $100 billion from household income nationwide, pinching families as well as the nation's economy, experts say.

For the typical Sonoma County household earning about $60,000 a year, the payroll tax bite will amount to about $100 a month.

"It's going to hurt," said Nicholas Stameroff, a Santa Rosa accountant. "Most people in this economy are living paycheck to paycheck, and they're stretched pretty thin."

Because Congress quietly let the payroll tax cut applied to 2011 and 2012 expire this year, many wage earners may be taken by surprise when they notice their smaller paychecks, he said.

"There aren't people in the streets complaining about this," Stameroff said.

Scott Hemmingsen of Santa Rosa, browsing the magazine rack at a downtown bookstore, said he was aware of the tax increase and shrugged it off.

"Taxes are a necessary evil," he said. "Nobody's happy about sending more money out of their pocket."

But diverting $100 billion a year from the Social Security system is unsustainable, he said.

"Sooner or later, we're going to need it," he said, referring to the government pensions many workers will depend on in retirement.

AARP, with a membership of more than 37 million, last year called on President Barack Obama and Congress to terminate the tax holiday. Continuing the 2 percent tax break would "undermine confidence in Social Security" and "put at risk" the program's funding stream, AARP Chief Executive Officer A. Barry Rand said in October.

Rep. Mike Thompson, D-St. Helena, a member of the tax-writing Ways and Means Committee, said the payroll tax cut was "always supposed to be temporary."

It was not extended "because people from both parties agreed that it set a bad precedent of weakening our Social Security funding structure," he said.

The multibillion-dollar losses to Social Security were offset by payments from the Treasury, but that was all borrowed money that boosted the national debt, said Barry Bosworth, an economist with the Brookings Institution in Washington.

"That's just sort of playing games," he said.

Carroll Estes of Healdsburg, a board member of the National Committee to Preserve Social Security and Medicare, said the two-year tax break served as "an economic benefit" to promote a sluggish economy.

But continuing to tap Social Security resources is troublesome because "it could be used to jeopardize the future of Social Security," Estes said.

The simple answer to Social Security's woes is to "scrap the cap," she said, referring to the current limit on payroll taxes to the first $113,000 of income.

That limit is why Bosworth believes the payroll tax increase will affect the economy because people making less than $113,000 save almost nothing.

"They spend everything," he said.

Consumer spending accounts for about 70 percent of the nation's economy, and some experts say the 2 percent tax boost will take a small but measurable bite out of economic growth in 2013.

"For some families, it will be a big deal," said Robert Eyler, a Sonoma State University economics professor.

But many others will find ways to offset the loss, such as working more overtime, starting a second job or trimming expenses.

The effect on local businesses will be felt most in the first six months of the year, then lessen as families make adjustments, Eyler said.

Santa Rosa resident Nancy Vail said. "People are going to feel it, but not drastically."

"Really, we're back where we were" with payroll taxes, she said.

Among the ways to save $100 a month, she suggested, standing on Fourth Street, are "not taking the family out for pizza" and "letting the kids get by" with older tennis shoes.

You can reach Staff Writer Guy Kovner at 521-5457 or guy.kovner@pressdemocrat.com.

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