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Consumers to see smaller paychecks despite 'fiscal cliff' deal

Congress did not extend a payroll tax cut, so workers will see the tax on their paychecks rise to 6.2% from 4.2% last year.

January 03, 2013|By Alana Semuels, Los Angeles Times
  • A couple descend an escalator while shopping at an H&M store in Atlanta. As of Tuesday working Americans saw a tax on their paychecks rise to 6.2% from 4.2% last year. Economists estimate that this could strip $115 billion in disposable income from the economy this year.
A couple descend an escalator while shopping at an H&M store in Atlanta.… (David Goldman, Associated…)

Robert Briones weathered the downturn in the economy well, working more than he needed, going on a vacation to Norway with his family and eating out at lunch from time to time.

But even the 48-year-old psychologist can't escape the latest blow to consumers' finances: a tax increase that will affect an estimated 160 million workers. As part of the deal on the so-called fiscal cliff, Congress extended tax breaks for middle-income families but did not extend a payroll tax cut that was set to expire this year.

As of Tuesday working Americans saw a tax on their paychecks rise to 6.2% from 4.2% last year. Economists estimate that this could strip $115 billion in disposable income from the economy this year.

"I'll cut back on the little things," said Briones, who makes about $100,000 a year and will pay $2,000 more in payroll taxes than he did last year. He anticipates that he'll make cuts in expenses such as gym memberships, eating out and piano lessons for his kids.

Workers who make $20,000 to $30,000 will take home an average of about $300 less a year, while those making half a million to a million dollars before taxes will take home $14,812 less because of income-tax increases related to the deal, according to calculations by the nonpartisan Tax Policy Center.

Although small cutbacks by families across the country may not have a dramatic effect on the economy, they do create more stress for the small businesses that had hoped the worst of the recession was behind them.

Consumer spending grew during the first three quarters of 2012 and had ticked up in November after falling in October. Now economists expect spending to decrease, at least for the first half of the year, while consumers like Briones adjust.

"The increase in taxes and the reduction in government spending should reduce overall aggregate demand for goods and services that businesses provide," said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co.

This year will be the first since 2008 that there hasn't been some sort of stimulus-related tax relief for individuals, said Joe Rosenberg, an analyst with the Tax Policy Center. In 2011 and 2012, there was the payroll tax cut. In 2009 and 2010, there was the Making Work Pay Tax Credit, which was part of the stimulus bill.

Most analysts expected that Congress would let the payroll tax cut expire, Rosenberg said. After all, as part of the fiscal cliff deal, income taxes will not increase on middle-income families. So compared with what families could be experiencing, the payroll tax cut is both expected and relatively small.

But that doesn't matter to consumers living paycheck to paycheck.

Jose Cueves, an electrician who makes $50,000 to $75,000 a year, says his family will notice the $70 or so a month that will be taken out of his paycheck. They'll eat dinner and lunch out less, he said, looking down at a burrito he bought at California Plaza in downtown Los Angeles during his lunch break.

That worries Valerie Johnson, who owns the Slap Yo Mama food truck among other businesses. Her food truck, which lined up Wednesday with others on Grand Avenue near California Plaza, was already seeing business slow down, she said.

Usually the first day after New Year's is busy because people have some spending money from the holidays, she said. On Wednesday, though, business was slower than it was during the holidays.

"We're an indulgence," said Johnson, whose truck sells Cajun and Creole food, including the Snoop Dogg Critzo — fried chicken and macaroni and cheese sandwiched between two waffles, then deep fried and covered in maple syrup.

"We make our money from people who already have a little extra to spend," she said. "These are accountants, money dealers, stockbrokers, and they're well-advised when it comes to money."

Johnson has become accustomed to ups and downs in business — with the gyrating economy, she said, business owners know they can't count on stability quite yet. So she and her husband will continue to sock away money and be prepared for another downturn, just in case.

"We're always on the cliff of a depression," she said.

But for some consumers the sheer relief that some sort of deal was reached in Congress alleviates some of the anxiety that had been building in the final weeks of the year. They include engineer Kevin Leeds, 57, who says he doesn't mind paying a little more in taxes as long as the country begins to reduce its deficit.

"We're all going to have to pay more," Leeds said.

Even though Congress still has to decide just how it will balance the budget in the long term, Leeds, of Santa Ana, sees progress despite the hit to his paycheck.

"I know they just bought us two more months, but I'm a little bit more confident they can reach an agreement," he said.

alana.semuels@latimes.com

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