While Washington came to an agreement to avoid the so-called fiscal cliff and save most Americans from an income tax increase, lost in the discussion is the fact that the average Maine household still will pay almost $1,000 a year in additional taxes.
The Tax Policy Center, a Washington-based research group, estimated that 77 percent of American households will face higher federal taxes in 2013. For most, the higher taxes will come primarily from the loss of a temporary reduction in Social Security payroll taxes.
For the last two tax years, U.S. employees’ contribution to Social Security was 4.2 percent, down from 6.2 percent previously. Now the tax rate has returned to 6.2 percent for 2013 for earnings up to $113,700.
In Maine, the median household income was $47,898 in 2011, according to the U.S. Census Bureau. The higher tax rate means the average Maine household will see less money — about $958 less a year, or about $18.42 a week.
“I don’t see it as much of an issue. It will have such a small effect on us. Personally, I have much more frustration with the politicians and the ridiculous way they went about the fiscal cliff talks,” said Christopher Godin, owner of Granny’s Burritos in Portland. “If I made a lot of money, maybe I’d care; but it’s not going to affect my decision on whether to give someone a raise or not.”
Without an agreement, taxes would have jumped by more than $500 billion in 2013, or an average of about $3,500 per household, according to the Tax Policy Center, a joint venture of the Brookings Institute and the Urban Institute.
Still, 2 percent of annual income is still 2 percent.
“Folks are going to feel the impact. It’s unfortunate timing, given the weak state of the economy and the weak state of the jobs situation,” said Joel Johnson, a policy analyst for the Maine Center for Economic Policy. “The 2 percent drop in the payroll tax was a measure to help the economy during the Great Recession. It’s not the greatest timing for this to be coming back.”
The payroll tax needs to be balanced against other benefits in the agreement, Johnson said.
“For folks living on the edge and making really difficult choices about basic needs, there is some good news,” Johnson said, citing the extension of unemployment benefits for another year, the child tax credit, and the earned-income tax credit and the higher education tax credit.
Without the extension of unemployment benefits, more than 2 million people who are long-term unemployed would have lost their benefits immediately, according to the National Employment Law Project, an advocacy group.
Other benefits of the agreement allow parents to keep a $1,000 child tax credit, as well as a tax credit of up to $2,500 for college tuition. The agreement also reversed an expected cut in the $3,000 credit for child and dependent care that was due to take effect.
Of course, not all the news in the fiscal cliff agreement is rosy for everyone.
The new tax package imposes income tax rate increases to 39.6 percent from 35 percent on individuals making more than $400,000 and for married couples earning more than $450,000. The federal health care reform act of 2010 also triggers a 3.8 percent tax on investment income of individuals making more than $200,000 a year and couples making more than $250,000 a year.