Partisan fight threatens $1,500 tax cut for workers
The logjam over federal spending in Washington, D.C., is threatening a tax break that's providing an income boost for millions of Americans whose wages have not kept pace with bills.
As part of a job creation package in 2010, the Social Security payroll tax was cut to 4.2 percent from 6.2 percent this year, giving many workers an extra $1,000 in 2011. But the two sides are divided over renewing the cut as Republicans call for an economic package that cuts spending and taxes, while President Barack Obama and Democrats are looking to raise taxes on wealthier individuals and some industries while cutting them in other areas. In particular, the White House wants Congress to further reduce the payroll tax to 3.1 percent, which would increase the average worker's take-home pay by $1,500.
If there is no action, the payroll tax reverts to 6.2 percent.
The White House said in a report Wednesday that the tax reduction in 2011 put about $1.6 billion into the Connecticut economy and $108.6 billion in the U.S. economy. A further decrease in the rate could pump $2.6 billion into Connecticut next year and about $178.8 billion into the larger U.S. economy, the report said.
The tax cut has helped the economy, two local experts said, but maybe not as much as the White House claims.
"Any time you talk about a payroll tax cut, it's a step in the right direction," Donald Klepper-Smith, chief economist for New Haven-based DataCore Partners said. "But businesses hire on whether you contribute to the bottom line."
He said the tax incentives can't make up for weak demand, but it can help individual families keep pace with rising costs for health care and other necessities at a time when many aren't seeing their base pay increase or have had hours cut.
Klepper-Smith noted the employment dynamic has changed in this economy as employers increasing rely on temporary workers to augment a fixed core of permanent workers.
"There's been a 28 percent growth in temporary workers since 2009," Klepper-Smith said.
"In and of itself, that sort of a tax cut is not going to create jobs," he said.
There has been improvement in the economy since the tax cut was enacted, with profit margins rising, but he said business is still not as strong as it was years ago and companies continue to maintain lean operations.
But Timpanelli said a boost in take home pay will help people keep up with bills, and that helps the larger economy, too.
Overall, Timpanelli said this tax cut to be a true benefit will have to accompany a larger package that should contain, tax and spending cuts as well as some tax increases.
Meanwhile in Washington, the two sides trying to enact policy to aid the economy traded fire over the payroll issue.
The White House in its report said the payroll tax cut would create jobs by increasing consumer spending.
But Senate Minority Leader Mitch McConnell, R-Ky., said Wednesday the issue isn't as simple as the President is making it and that Republicans are against supporting a payroll cut if it requires heavier tax burdens on other taxpayers, including employers and small business.
While the two sides fight it out, according to the White House, 2 million Connecticut residents who received the tax credit will lose it next year unless they act.
However, Connecticut's work force, according to the U.S. Labor Department only has 1.88 million in it and of those, only about 1.6 million had jobs in October.