Like many in Congress, U.S. Rep. Charlie Gonzalez of Texas says letting a payroll tax cut expire would be a bad move for families.
The San Antonio Democrat said in a Dec. 13, 2011, press release: "If Congress does not pass the renewal of the payroll tax cut before the end of the year, nearly 160 million working families will see their taxes go up by roughly $1,000."
That many families will face that much of a tax hit?
The payroll tax at issue is the 6.2 percent of eligible earnings that American workers pay to help fund Social Security. It’s called a payroll tax because the money is taken directly out of people’s paychecks. There are limits to the total amount that individuals are required to pay. In 2009 and 2010, the levy applied to the first $106,800 of salary, meaning no one would pay more than $6,621. Employers paid a matching share.
In December 2010, the employee tax was cut to 4.2 percent through 2011 as part of an agreement President Barack Obama worked out with Congress to extend income-tax reductions passed during President George W. Bush’s administration. Obama later proposed slicing the payroll levy to 3.1 percent for workers next year.
Congress has been debating how to extend and possibly expand the payroll tax cut.
Asked how Gonzalez settled on his figures, his office urged us to contact the Office of Management and Budget, which is part of the executive branch, and also pointed us to a November 2011 web post by the Center for American Progress, a left-leaning think tank, stating that the average annual benefit per household if Obama's proposed cut to 3.1 percent was adopted would be $1,426. A footnote attributes that information to the Urban Institute-Brookings Institution Tax Policy Center, an independent research organization.
In an interview, Roberton Williams, a senior fellow at the center, walked us through its estimates of the impact of renewing the current payroll tax cut through 2012.
Regarding the congressman’s reference to the tax cut benefiting "nearly 160 million working families," the center estimates that the country will have 165 million households in 2012. However, it says, about 122 million households — not nearly 160 million — are projected to benefit from extending the cut. About 40 million households would not benefit, Williams told us, because the residents are not projected to have paying jobs.
The congressman, he said, "has got the wrong number of benefiting households."
Next, we took up the claim that working families will see their taxes go up by roughly $1,000 if the cut is not extended.
By the end of this year, according to another center calculation, nearly 121 million households will have taken home an average of $934 more thanks to the cut. And the center estimates that the average benefit, for all benefiting households, would be $920 in 2012.
Logically, the dollar value of each household’s projected 2012 tax savings is greatly driven by how much each household earns. If the payroll tax cut is extended, the center projects, the poorest 20 percent of households will average a $165 benefit. Higher-income households would accumulate more take-home dollars; households earning $62,043 to $104,401 are projected to average $1,280 in benefits and those earning $104,402 or more would average $2,253 in 2012 benefits.
Next, we asked the OMB about the $1,000 tax-cut figure. By email, spokeswoman Meg Reilly pointed out that according to the U.S. Census Bureau, the nation’s median household income in 2010 was $49,445, nearly $50,000 -- the 2-percent cut amounts to $1,000 of that total.
Summing up, the center’s Williams told us that extending the cut would benefit about 122 million households next year, saving them an average of a little over $900 apiece. "The range will be large, though, going from virtually no savings for people who work very little to" more than $2,200 for workers with the highest earnings, he said.
Gonzalez’s claim overstates the households that would benefit from extending the tax cut -- by about 40 million. Also, his warned-of $1,000 tax increase is based on an average; actual results for each working family would vary widely. We rate his statement Half True.
UPDATE, Feb. 16, 2012: This article has been updated to clarify that the projection cited by the Center for American Progress applied to President Obama's unsuccessful proposal to reduce the payroll tax by 3.1 percent.