Federal payroll tax to increase 2 percent

It’s the end of cliff-related metaphors for the U.S. economy as we know it, but local residents will most likely still see an increase in taxes.

Past its own New Year’s deadline, Congress sent President Barack Obama legislation to avoid a national “fiscal cliff” of middle class tax increases and spending cuts late Tuesday night in the culmination of a struggle that strained America’s divided government to the limit.

While the tax package Congress passed New Year’s Day will protect 99 percent of Americans from an income tax increase, most of them will still end up paying more federal taxes in 2013.

That’s because the legislation did nothing to prevent a temporary reduction in the Social Security payroll tax from expiring. In 2012, that 2-percentage-point cut in the payroll tax was worth about $1,000 to a worker making $50,000 a year.

Payroll tax increases of 2 percent will be felt right away, said State Rep. Rich Murray, R-Albert Lea, giving a person making $1,000 every two weeks an about $20 increase in taxes each paycheck. That 2 percent payroll tax saved a typical Minnesota family of four making $87,000 about $1,700 last year.

“It’s certainly going to have a negative impact on the state,” said State Sen. Dan Sparks, DFL-Austin, highlighting Minnesota’s February budget forecast as the point when any damage done would become most visible.

Sparks said many Minnesotans still trying to recover from the recession would be hurt by the increase in taxes.

The Tax Policy Center, a nonpartisan Washington research group, estimates that 77 percent of American households will face higher federal taxes in 2013 under the agreement negotiated between President Barack Obama and Senate Republicans. High-income families will feel the biggest tax increases, but many middle- and low-income families will pay higher taxes too.

Households making between $40,000 and $50,000 will face an average tax increase of $579 in 2013, according to the Tax Policy Center’s analysis. Households making between $50,000 and $75,000 will face an average tax increase of $822.

“For most people, it’s just the payroll tax,” said Roberton Williams, a senior fellow at the Tax Policy Center.

The tax increases could be a lot higher. A huge package of tax cuts first enacted under President George W. Bush was scheduled to expire Tuesday as part of the “fiscal cliff.” The Bush-era tax cuts lowered taxes for families at every income level, reduced investment taxes and the estate tax, and enhanced a number of tax credits, including a $1,000-per-child credit.

U.S. Rep. Tim Walz lauded the bill though it left out funding for the Beginning Farmer and Rancher Program, among other things.

“While I’m disappointed that it isn’t the larger, ‘Go Big’ type deal I have been advocating for, this bill is a good first step and I’m pleased a compromise was finally reached to avert the fiscal cliff,” Walz said in a statement.

U.S. Democratic Sens. Amy Klobuchar and Al Franken both backed the measure as well. Franken, up for re-election next year, expressed reservations but praised the bill’s extension of tax cuts for the middle class and unemployment insurance. He says he was glad it doesn’t cut safety net programs.

Klobuchar also says the bill was worth supporting but that she wanted a more comprehensive mix of new revenue and spending cuts.

Actual decisions aside, even the threat of the cliff was enough to impact the economy. Chuck Moline, president of AdviserNet Financial, said there was a “tremendous amount of uncertainty” in the markets, and hiring was already down. Small businesses had suffered from a much less lucrative holiday season than they had hoped for as people braced themselves for tax hikes.

“People are tightening up,” Moline said. “We’re seeing that here in our local community.”

The uncertainty has bred confusion, he added.

“I think the general public, in planning for this, doesn’t have any clear direction as to what to do,” he said.

District 27A Rep. Rich Murray, R-Albert Lea, who also owns ISC Financial Advisors, said some of his clients were lightening up on stocks in preparation.

“We’ve had more concern from clients over this than probably any other issue I’ve seen in the last 10 or 15 years,” he said. “The markets don’t like uncertainty.”

On the plus side for Minnesota, the state is a relatively minor recipient of the sorts of federal grants and programs that are subject to “sequestration,” Washington-speak for automatic spending cuts.

Federal procurements and salaries amount to only 1.8 percent of the state economy, far below the national average of 5.3 percent, according to an analysis by the Pew Center on the States.

Even those spending cuts, particularly in defense, are subject to revision as Congress confronts the next looming fiscal crisis — over the debt ceiling — most likely at the end of February.

Moline expressed his distaste in Congress delaying action and letting the federal government allow tax increases and spending cuts to take effect.

“It’s really sad that we’re facing this fiscal cliff,” he said. “Politicians have known this was coming for two years and have done absolutely nothing until now.”

Even if Congress had managed to avoid the fiscal cliff, Moline said Monday morning he expected the agreement would fail to be a permanent solution.

“It’s going to be extremely watered down, and we’re going to be once again face with this mid-year in 2013,” he said.

While Congress failed to prevent a nationwide careening over the proverbial cliff, Randy Kramer, a certified financial planner in Austin, insisted residents should keep an eye on their assets regardless.

“This is a time where everybody should be paying attention to how their investments are allocated,” he said. “While slightly higher income tax rates and decreased government spending will impact everyone, the extent of that is yet to be determined.”

While the fiscal cliff held many unknowns to make investors wary, Kramer said people should be conscious of possible risks at any time, not just in light of a possible fiscal cliff.

“Unpredictable events happen periodically,” he said.

As the hours ticked down toward the midnight deadline Monday, tensions ran high and doubts lingered as to whether Congress would succeed in averting the approaching fiscal cliff. In the building New Year’s Eve drama, the parties were at an impasse over whether to put off the automatic, across-the-board spending cuts set to take effect at the beginning of the year and if so, how to pay for that.

One emerging deal would have raised tax rates on family income more than $450,000 and individual income more than $400,000 a year, increase the estate tax rate and extend unemployment benefits for one year.

— The Associated Press contributed to this report.