Many Americans brace for loss of payroll tax cut

[December 22, 2011]  WASHINGTON (AP) -- Some say they'll spend less on groceries. Others expect to cut back on travel. For many, there would be fewer meals out.

Across the country, Americans are bracing for another financial hardship: smaller paychecks starting in January, if Congress doesn't break a deadlock and renew a Social Security tax cut.

The tax cut, which took effect this year, benefits 160 million Americans -- $1,000 a year, or nearly $20 a week, for someone making $50,000, as much as $4,272 or $82 a week for a household with two high-paid workers.

The tax cut is set to expire Jan. 1. If lawmakers don't renew it for 2012, analysts say the economy would slow as individuals and families looked for ways to spend less.

"Of course, it changes my plans," said Craig Duffy, an information-technology worker from Philadelphia and new father of twins. Duffy said his family already has tightened spending, so "we'll have to find a way to cut back."

That might mean canceling a planned trip to visit the twins' grandparents in Wisconsin, Duffy said.

The tax cut is part of legislation that would also renew benefits for the long-term unemployed. If the unemployment benefits aren't renewed, starting in January nearly 6 million people would lose weekly checks averaging about $300 -- the main source of income for most of them.

House Republicans have rejected a Senate-passed bill that would extend the payroll tax cut for two months and let the long-term unemployed continue to receive benefits during that time. That plan would give lawmakers time to work on a yearlong extension.

But most lawmakers have left Washington, and no negotiations are scheduled before the year ends.

If Congress doesn't renew the two measures for 2012, analysts say the economy's growth would slow by as much as 1 percentage point.

Less money in paychecks means less consumer spending, which powers the U.S. economy. Many people who say they already depend on each paycheck for living expenses say they can't cut spending deeply. Instead, they'll trim at the edges, wherever they can.

"It will limit my spending from week to week," said Jennifer Stempel, an office manager from Denver.

Stempel said that could mean making fewer impulse buys at the grocery store, packing her lunch each day and rejoining a carpool she quit after gas prices declined this year.

"I was starting to relax about (travel expenses), but now I don't know," Stempel said.

Michael Allara of Raleigh, N.C., said a higher tax would further pressure his family, which includes three small children.

"I'm already trying to save as much as I can to pay for college," Allara said. "I don't know where the money would come from."

The tax cut lowered the Social Security tax on incomes of up to $106,800 from 6.2 percent to 4.2 percent. It's meant a maximum savings of $2,136 for an individual.

Without a deal, Americans would begin 2012 facing a tax increase just as an election year begins.

Smaller paychecks and reduced spending would coincide with a still-vulnerable period for the U.S. economy. Though growth has strengthened in the final months of 2011, some analysts say the gains might be hard to sustain. Workers' pay isn't rising much. And Europe may be on the verge of a recession that would undermine the American economy.

"A failure to extend the payroll tax holiday and the extended unemployment benefits would be a serious hit to the economy," said Mark Zandi, chief economist at Moody's Analytics. "The risk of a recession would rise and be uncomfortably high, particularly early next year, when the fallout from Europe's troubles will be the greatest."

Zandi predicts that the U.S. economy will grow 2.6 percent in 2012 -- if Congress renews the tax cut and long-term unemployment benefits. Otherwise, he foresees 1.7 percent growth. He estimates the higher Social Security tax would reduce growth by 0.6 percentage point, and the loss of extended unemployment aid would subtract an additional 0.3 percentage point.

Other economists have made similar estimates. Many noted that the Social Security tax cut helped the economy avoid a recession in 2011, after high gasoline prices squeezed households, Japan's earthquake reduced supplies to U.S. factories and budget cuts by state and local governments and a stalemate in Washington slowed growth.

The extension of unemployment benefits helped, too. Most states provide up to 26 weeks of benefits. The program that's set to expire extended those benefits for up to 99 weeks in states with the highest unemployment rates. A proposal approved by the House last week would extend benefits for up to 79 weeks.

Unless the long-term benefits are renewed, 2.2 million people will lose benefits by mid-February, and that number will rise to 3.6 million by the end of March.

Analysts note that Americans of all income levels would be hurt by the loss of the payroll tax cut.

Higher-income Americans receive the biggest share of tax breaks, so the end of the tax cut would reduce their pay most. Economists note that the highest-earning 20 percent of Americans contribute nearly 40 percent of consumer spending. And for 2012, the Social Security tax will apply to the first $110,100 of wages, up from $106,800 in 2011.

Still, lower- and moderate-income taxpayers tend to spend more of any extra pay they receive. So the loss of a tax benefit tends to reduce their spending most sharply.

Shana Albright, a fundraiser for a nonprofit health care company in St. Louis, said she would have to cut back on dining out and shopping. If she didn't have the tax break this month, she would have cut back on holiday gift buying, she said.

"It's definitely my spending money," Albright said.

Some analysts say they think election-minded lawmakers will renew the tax cut and long-term unemployed benefits sometime in 2012. If they did, they could also make the tax cut retroactive to Jan. 1.

That might cause headaches for company payroll departments. But it would be a boon for struggling Americans.

"After all the arguments, Congress will extend the two programs," said Nariman Behravesh, chief economist at IHS Global Insight. "I can't imagine that lawmakers will want to be blamed for the economy being even weaker than it is now. They would be committing political suicide.

[Associated Press; By MARTIN CRUTSINGER]

AP Business Writers Daniel Wagner in Washington, Christopher Leonard in St. Louis and Bree Fowler in New York contributed to this report.

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