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Paychecks shrink as fiscal rhetoric expands

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ST. PAUL -- Americans will pay Washington more, despite rhetoric from politicians saying they shot down most tax increases on New Year's Day, and in the aftermath of what widely was described as a flawed federal budget bill the public should expect more federal fiscal drama in coming months.

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"We have avoided crashing and burning," Minnesota State Economist Tom Stinson said, but there remains enough uncertainty and anxiety to go around.

While income taxes will rise only on the richest 2 percent, the federal Social Security tax will go up.

Stinson said the average American tuned into the wrangling over the "fiscal cliff" of recent weeks thought it was only about "taxes on high-income individuals, and he did not realize that he had gotten some significant tax breaks (in recent years), one of which is going away."

Someone making $50,000 a year will pay the Social Security Administration (listed as FICA on paychecks) $1,000 more in 2013 than in the past year, Stinson said. Even so, if Congress had not acted, higher income taxes would have taken two or three times that.

When Congress passed a fiscal cliff bill Tuesday night, it was just the first step to reducing the federal deficit. That cliff was averted, but much more debate remains.

Sen. Kent Conrad, D-N.D., chairman of the Senate budget committee, voted for the bill, but like most members of Congress, called it far from perfect.

"This is not, by any standard, a deficit-reduction plan," Conrad said on the Senate floor Wednesday, a day before he retires from Congress. "As necessary as it is, no one should be misled that this deals with our deficit and debt, because it only makes our debt circumstance worse."

Stinson compared the fiscal cliff to downhill skiing, which usually starts with a steep slope, then turns more gradual before another sharp decline. The fiscal debate is in the gradual area now, he said, before it turns steep again when the federal government reaches its debt limit late next month.

"It's better than it would have been than if Congress and the president had not reached an agreement, but it is not great," Stinson said.

Shortly after the U.S. House approved a bill Tuesday night to keep most President George W. Bush-era tax cuts in place. President Barack Obama described the deal as "a law that raises taxes on the wealthiest 2 percent of Americans while preventing a middle-class tax hike that could have sent the economy back into recession and, obviously, had a severe impact on families all across America."

Stinson predicted that most Americans will be surprised that their paychecks will shrink this month after hearing so much during Washington fiscal cliff debate about preventing most tax increases.

"Twenty dollars a week does not seem like much in the grand scheme of things, but every week you probably spent that $20 and bought pizza or movie tickets or something discretionary," Stinson said.

The biggest impact could be felt by restaurants and entertainment industries, Stinson added, because most people will continue spending about the same on items such as gasoline and groceries.

"This isn't a big hit, but it is going to be noticeable," he said.

Once people get used to the slightly smaller paycheck, they likely will notice an increase in political rhetoric as it comes time to reduce the national debt by cutting spending.

"In two months or three months you are going to see the most horrendous showdown you have ever seen," predicted U.S. Rep. Collin Peterson, D-Minn. "Much worse than this. Get ready."

Part of this week's bill eliminated an existing law requiring automatic $1.2 trillion spending cuts over the next decade. That is expected to be the next big debate.

Obama and congressional leaders were negotiating how to avoid tax increases that were to expire and how to cut spending, both to help reduce the federal debt. At the last minute, after months of discussion, they only could agree to maintain the decade-old tax rates for most Americans, but not on other measures to manage the debt.

On top of that, Congress has not passed a federal budget for the year that began Oct. 1. That debate is due about the same time as the government reaches the legal debt limit.

The tax measure passed the Senate 89-8 on New Year's Eve and the House 257-167 New Year's night.

All senators from North Dakota, South Dakota, Minnesota and Wisconsin voted for the measure, but they were split in the House.

Peterson was the only House Democrat in those states to oppose the bill. The only Republicans from the four states voting for the measure were Reps. John Kline of Minnesota, Kristi Noem of South Dakota and Reid Ribble and Paul Ryan of Wisconsin.

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Don Davis
Don Davis has been the Forum Communications Minnesota Capitol Bureau chief since 2001, covering state government and politics for two dozen newspapers in the state. Don also blogs at Capital Chatter on Areavoices.
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