Payroll tax hike: Valley residents feel the pain

NORTHERN SAN JOAQUIN VALLEY -- Like millions of other Americans, people who earn paychecks in the Northern San Joaquin Valley are feeling the sting from the sharp increase in payroll taxes that took effect in January.

Workers saw amounts from $50 to more than $100 disappear from their monthly take-home pay when a two-year payroll tax break wasn't extended in the New Year's Day package approved by Congress, which settled a bitter debate over taxes and deficit reduction. The increase will amount to $580 to $820 this year for households making $40,000 to $75,000 a year.

Leslie Shaw Klinger of Modesto said she adjusted her budget last month to absorb a $110 monthly increase in deductions from her paycheck, and it's now coupled with rising gas prices. She commutes to Antioch to work as a supervisor processing Medi-Cal applications for Contra Costa County.

"I've cut out getting my nails done and save my pennies before getting my hair done," she said. "I cannot find a job in the valley that pays enough to own a house here. I figure it means I will cut back even more."

On The Bee's Facebook page, more than 20 comments were registered when readers were asked how the tax increase was affecting them.

Rhonda Parker, a letter carrier in Modesto, said her smaller paycheck was causing her to stay home and give up movies and dining out.

Ashley Randi vented her frustration with the White House. "We are losing $30 a week," she wrote. "That's almost $1,600 a year. For everyone who voted for (Barack Obama), is this the 'change' you wanted?"

Danny Mota wrote that it does not matter "who is president. The working people will always get screwed over one way or another. That's why I don't waste time voting."

The payroll tax has gouged paychecks as the economy is giving conflicting signals. Chain-store sales have weakened over the course of the past month, and two recently released surveys suggest that consumer confidence is eroding, especially among lower-income Americans.

At the same time, some experts are predicting more robust growth and hiring in the north valley this year, and the housing market is showing signs of life.

Break meant to be temporary

The payroll tax break, which was pushed by the White House to stimulate spending in 2011 and extended in 2012, was always supposed to be temporary. With pressure building in Washington to reduce the deficit and politicians fighting bitterly over whether to raise taxes on the very rich, the question of how the increase in Social Security taxes would affect the poorest workers did not seem to garner much debate on either side of the aisle.

"I don't see any reason to consider supporting its extension," said Treasury Secretary Timothy Geithner in testimony last year. Nancy Pelosi, a reliable liberal who leads the Democratic minority in the House of Representatives, was for letting it expire.

The higher rate applies to all earned income up to $113,700. For a household earning $100,000 a year, the 2-percentage-point increase means an additional $2,000 a year in payroll deductions.

Economists estimate that the payroll tax increase will reduce disposable income by about $120 billion and shave half a percentage point from economic growth in the first quarter — a significant blow given that the economy is expected to expand only 1 percent to 2 percent in the first half of 2013.

"If you wanted to design a policy to squeeze the spending of lower- and middle-income households, raising the payroll tax is the way to do it," said Ian Shepherdson, chief economist at Pantheon Macroeconomic Advisors. "It's very regressive."

Retailing analysts and economists say high-end earners will largely be spared.

"I wouldn't expect it to have much of an effect on BMW consumption," said Richard H. Thaler, a professor of behavioral science and economics at the University of Chicago's Booth School of Business. "The people who will notice it the most are the ones making the least."

Two people sharing comments on The Bee's Facebook page thought the tax increase was manageable.

Modesto resident Mel Evans Schwerdtfeger wrote, "Don't mind the taxes. We know how to budget and still have fun."

Some adjust, some shop less

Sergio Perez of Modesto said the payroll tax simply returned to its normal level. "We just need to adjust and do what we can with what we earn, if we're lucky enough to be employed," he wrote.

Veronica DeShields was concerned, however, about the combined effect on the economy from rising taxes, gas prices and the health-reform mandates going into effect next year.

In Medford, Ore., Darchelle Skipwith had to scrap her monthly budget and start over when the payroll tax break expired.

She is buying less meat; driving less often to see her sister, who lives 12 miles away in Eagle Point; and putting less away in savings. In August, she hopes to get a raise of 50 cents an hour at her job stocking shelves at Walmart, which should help make up the difference.

For now, she has no choice but to change her daily routine.

"I added it up — it's about $75 a month," Skipwith said. "That's not a lot for some people, but mine is the only paycheck. I don't have extra money coming in."

Of course, taxes are going up on wealthier Americans, too, with a rise in marginal rates on income above $400,000 for individuals, and higher taxes on capital gains and dividends. But millions of decisions by poorer Americans nationwide are quickly adding up.

Data on retail sales in January indicated a steady deterioration in shopping activity.

"There is something going on," said Chris G. Christopher Jr., senior principal economist at IHS Global Insight. "The payroll tax seems to be cutting into things."

Trends are divergent

That pattern was apparent in a Thomson Reuters/University of Michigan survey of consumer sentiment released this month, according to Richard T. Curtin, who directs consumer surveys there.

When asked how their financial situation had changed in January, 32 percent of people with incomes below $75,000 said their pay had dropped, compared with 13 percent who said it had increased. By contrast, 38 percent of people earning more than $75,000 said their wages had gone up last month, and 23 percent said they had gone down.

"We rarely see such divergent trends," Curtin said. "Mostly it was the payroll tax hurting the lower incomes, while higher-income folks had a boost from things like dividends."