Payroll Tax Impact

By Josh Lehner
Oregon Office of Economic Analysis Blog.

The American Taxpayer Relief Act of 2012, which was actually enacted in 2013, was the result of the last minute fiscal cliff negotiations and contains myriad tax and spending provisions. Included in the bill was a two month delay in the budget sequestration, a return of the top marginal personal income tax rate to 39.6%, a permanent AMT patch, adjustments to the personal exemption phaseout, estate tax, bonus depreciation and many more. While all of these items are important in one way or another, probably the two items that have the most immediate impact are the one year extension of emergency unemployment insurance benefits and the expiration of the 2% payroll tax cut. The reason being are these actions affect individuals’ income immediately, while some of the other provisions have longer-run impacts.

Individuals receiving UI benefits are, by definition, unemployed and without a current source of income, and spend the vast majority of the benefits. Increasing (or rather not decreasing) these payments assures not only a source of income for these individuals so they can continue to pursue employment but also a certain level of overall spending in the economy.

The 2% payroll tax cut expiration affects all employed individuals and the total impact across the country is estimated at $113 billion, which is about 0.7% of nominal GDP. For the median household earning about $50,000 per year, this results in higher taxes by approximately $1,000. This increase restores the payroll tax (contribution to social security) to the full 12.4% (the employee share had decreased from 6.2% to 4.2%, this is now restored). This impact is being felt in paychecks around the country and is expected to slow consumer spending and economic growth. Our macroeconomic vendor, IHS Global Insight, estimates that the expiration of the payroll tax cut will shave about 0.4% off real GDP growth in 2013.

The graph on the left shows both personal income and disposable personal income (income less taxes) for the U.S. overall. While the two series move closely together over time, certain tax policies can result in differences. Today, as taxes are going up due to ATRA (2012), disposable personal income is expected to grow more slowly than overall personal income.

The graph on the right shows Oregonian’s per worker contribution to social security (both the employee and employer shares). The payroll tax cut is clearly seen in the historical data and the forecasted impact of the expiration is also evident. When I calculate the impact of this payroll tax change based on these statewide figures, I find that the 2% cut in 2011 was worth approximately $1.1 billion to Oregonians. That is, over the course of the year every employed Oregonian’s paycheck was a little bit bigger than prior to the tax cut to the tune of over $1 billion across the state. This resulted in individuals and households spending a little bit more, paying down debt and/or increasing savings; all of which are good things overall. The estimated impact of the reversal of this cut in 2013 in our forecast is approximately $1.3 billion. The reason the 2013 estimate is larger than the 2011 estimate is we have more employed Oregonians today than we had 2 years ago and also there have been wage gains across the state. Both of these factors result in a larger overall impact. [In conversation with the Oregon Legislative Revenue Office, their models find similar, yet slightly higher, impacts. LRO estimates the 2013 impact to be $1.38 billion.] These estimates amount to between 0.6% and 0.7% of Gross State Product, and will affect consumer spending across the state.


One of the areas where we expect this impact to materialize is in spending on video lottery. Many discussions surrounding the tax revenue impacts of ATRA (2012) at the state level dealt with sales taxes, which do not apply to Oregon. However, video lottery is a form of entertainment and a revenue source for the state. With consumers’ paychecks decreasing due to the tax impact, our office expects video lottery sales to grow at lower levels. The graph below shows year-over-year growth on a 4 week moving average basis (to smooth the weekly fluctuations somewhat). Throughout the fall, video lottery sales were growing at the strongest rates seen since late 2007, or prior to the recession. However that momentum has stalled and growth is now around 2 percent, which is about the growth rate seen over the past couple years. Overall, our office estimates that the payroll tax cut will shave a little less than 1 percentage point of growth off of video lottery sales in 2013. Translated into actual revenues to the state, it might not be too much but it is about $3 million per year.


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