A big tax increase is looming

This year the question is whether the super committee will produce a budget plan before its Thanksgiving deadline, but nobody seems worried about the $110 billion tax increase on workers set to hit on January 1

By , Guest blogger

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    A group of bipartisan members of Congress gather for a news conference on Capitol Hill in Washington Wednesday, Nov. 16, 2011. Amid the worry over whether or not Congress' debt supercommittee will produce a budget before Thanksgiving, people are forgetting about the looming tax hike that would shrink bi-weekly paychecks by an average of $35, Williams argues.

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A year ago, the big worry in Washington was whether Congress would extend the Bush tax cuts before their end-of-year expiration. Failure would have meant a huge tax hike.

This year the question is whether the super committee will produce a budget plan before its Thanksgiving deadline. Failure could mean huge spending cuts.

Meanwhile, nobody seems worried about the $110 billion tax increase on workers set to hit on January 1.

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Last December’s tax bill cut the worker’s share of the FICA tax that funds Social Security by 2 percentage points—an average of just over $900 each for 120 million households. That money surely boosted consumer purchases as it dribbled into workers’ paychecks throughout the year. But six weeks from now it disappears like Cinderella’s coach at midnight.

Two months ago the president proposed to boost the tax cut by half for 2012—to 3.1 percent—as part of his American Jobs Act. We know how far that’s gotten. Since Senate Republicans basically tabled the bill last month, Democrats have reintroduced it piecemeal. They failed repeatedly until last week when the Senate passed a handful of jobs subsidies for veterans, a political no-brainer right before Veterans’ Day.

Maybe Democrats plan to bring up the payroll tax cut after the super committee fails to offer a budget plan next week. Maybe they’ll wait longer to build pressure as the year winds down. I have no idea—I’m just an economist.

What I do know is that if Congress does nothing, biweekly paychecks will shrink in January by an average of about $35, just as the holiday bills arrive. That surely won’t help consumer spending.

If Congress does extend the larger payroll tax cut through 2012, the average worker will keep that $35 plus an additional $20 or so every two weeks. That’s not a lot but over the year, it adds up to an extra $170 billion of potential spending.

I suspect that Congress will go down to the deadline again this year as political calculations determine what happens when. In the end, we’ll have another year of reduced payroll taxes, maybe the same as this year, maybe more. If that’s all we’re going to get, the least the good folks on Capitol Hill can do is deliver well ahead of the holidays.

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