WASHINGTON – The prospect of the American economy careening off a cliff overshadowed a tax increase that takes effect immediately, rich or not.
Even with the deal on Capitol Hill, the so-called payroll tax is scheduled to bounce back up to 6.2 percent from 4.2 percent in 2011 and 2012.
In practical terms, this amounts to a $1,000 tax increase for someone earning $50,000 a year and a $2,200 tax increase for someone earning $150,000.
Even workers taking home less than $20,000 annually will be impacted, paying roughly $100 more.
“I think it will have a negative effect,” says Neil Buchanan, a law and economics professor at George Washington University.
“(The payroll tax holiday) was one of those things that was designed to be invisible so that people would treat it as part of their take home pay and spend it,” he says, noting many people never understood the tax reprieve and how its expiration would affect them.
Mark Vitner, senior economist at Wells Fargo, predicts the economy will grow just 1.5 percent in 2013, down from 2.2 percent in 2012.
“The expiration of the payroll tax holiday will reduce after-tax income for all workers and hit lower to middle income families the hardest,” he says.
Mark Zandi, chief economist at Moody’s Analytics, calculates that the higher payroll tax will reduce economic growth by 0.6 percentage points in 2013.
The other possible tax increases – including higher taxes on household incomes above $450,000 a year – will slice just 0.15 percentage points off annual growth, he says.
Here are some other implications of the budget deal.
- Income tax rates: Extends decade-old tax cuts on incomes up to $400,000 for individuals, $450,000 for couples. Earnings above those amounts would be taxed at a rate of 39.6 percent, up from the current 35 percent. Also extends Clinton-era caps on itemized deductions and the phase-out of the personal exemption for individuals making more than $250,000 and couples earning more than $300,000.
- Estate tax: Estates would be taxed at a top rate of 40 percent, with the first $5 million in value exempted for individual estates and $10 million for family estates. In 2012, such estates were subject to a top rate of 35 percent.
- Capital gains, dividends: Taxes on capital gains and dividend income exceeding $400,000 for individuals and $450,000 for families would increase from 15 percent to 20 percent.
- Alternative minimum tax: Permanently addresses the alternative minimum tax and indexes it for inflation to prevent nearly 30 million middle- and upper- middle income taxpayers from being hit with higher tax bills averaging almost $3,000. The tax was originally designed to ensure that the wealthy did not avoid owing taxes by using loopholes.
- Other tax changes: Extends for five years Obama-sought expansions of the child tax credit, the earned income tax credit, and an up-to-$2,500 tax credit for college tuition. Also extends for one year accelerated “bonus” depreciation of business investments in new property and equipment, a tax credit for research and development costs and a tax credit for renewable energy such as wind-generated electricity.
- Unemployment benefits: Extends jobless benefits for the long-term unemployed for one year.
- Cuts in Medicare reimbursements to doctors: Blocks a 27 percent cut in Medicare payments to doctors for one year. The cut is the product of an obsolete 1997 budget formula.
- Across-the-board cuts: Delays for two months $109 billion worth of across-the-board spending cuts set to start striking the Pentagon and domestic agencies this week. Cost of $24 billion is divided between spending cuts and new revenues from rule changes on converting traditional individual retirement accounts into Roth IRAs.
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WTOP’s Andrew Mollenbeck and the Associated Press contributed to this report. Follow @WTOP on Twitter.
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