Economy could get bumpier if tax cut expires Dec. 31
— -- Economists are growing more worried that Congress will not extend this year's payroll-tax cut past Dec. 31, pulling up to $120 billion out of consumers' pockets and cutting into already tepid forecasts for household spending in the first half of 2012.
The tax cut was approved as a temporary measure last fall. The law cut the tax paid by employees, which supports the Social Security program, to 4.2% of the first $106,800 of a worker's income from 6.2%. That cut gave $1,000 back to a worker earning $50,000 a year.
The problem is that 70% of economists' forecasts anticipate the cut would be extended in 2012, as the economy struggles and unemployment remains stubbornly high, said Randell Moore, editor of the Blue Chip Economic Indicators forecasting newsletter. Throw in the $30 billion at risk if Congress doesn't agree to continue long-term unemployment compensation, which is also up for renewal, and it amounts to almost 1% of gross domestic product, said Joel Prakken, chairman of Macroeconomic Advisers in St. Louis.
"And it occurs quite quickly at the beginning of the year," Prakken said. "It's a meaningful drag."
Without an extension, Mesirow Financial Chief Economist Diane Swonk said that consumer spending growth could slump as much as a third lower than the 1.7% annual rate she projects by mid-2012.
Real after-tax personal incomes would probably shrink instead of growing slightly, she added.
"What's really disturbing is how little this has been discussed — like, not at all," Swonk said. "Political analysts think renewal is not a sure thing. And that's really scary. The timing on this couldn't be worse, with Christmas coming and Europe in crisis."
President Obama's jobs package, proposed in September, called for extending the tax cut, and for expanding it by giving small businesses a reduction of employers' 6.2% contribution to payroll taxes. It would also eliminate employer-paid taxes on up to $50 million worth of wages for new hires and money used to give existing workers raises. The full package failed to win enough support in the Senate to be brought up for a final vote.
Payroll taxes will be brought up for a vote separately in late November or early December, said Brian Fallon, an aide to the Senate Democratic caucus. No date has been set for a vote in the House.
Republicans have been skeptical of extending the payroll-tax cut, while not dismissing it.
"It is part of the discussions ongoing about how we resolve this budget issue by the end of the year," House Majority Leader Eric Cantor said last week at Rice University in Houston. "And we'll continue to sort of focus on that, with the tenet we don't think taxes should go up on anybody."
Retailers want the cut extended, even though they think its impact on retail sales this year has been more modest than economists suggest, said David French, senior vice president for government relations at the National Retail Federation. Fluctuating energy prices may have had more effect than taxes on this year's move from weak consumer demand early in 2011 to a more brisk second-half pace, he said.
Related Stories
ABC News Live