Payroll Tax Cut Extension Could Give Consumers $85/Mo.

Thanks to the payroll tax cut renewal, a worker could continue to get another $85 a month.

The House and Senate reached an agreement late Wednesday night on legislation to renew the two percentage-point cut in the payroll tax, which was set to expire at the end of this month, as well as jobless benefits for millions of unemployed Americans.

It is hoped that the deal will be passed off for a vote in the House and Senate this week.

"For working families facing tight budgets, this can make a real difference in paying for groceries, school supplies, and the monthly rent or mortgage payment," Gary Burtless, economist with the Brookings Institution, said. "If Congress had allowed the payroll tax cut to lapse, these families would have immediately felt the squeeze of a smaller paycheck.  Many would have cut their spending, slowing the pace of the current recovery."

For a worker or family earning $50,000 a year in wages, the payroll tax cut reduces Social Security tax withholdings by $1,000 a year, he said. This boosts after-tax income by about $85 a month.

For families further up the income ladder, it is less clear whether they would see such an immediate impact of letting the payroll tax cut end, Burtless said.

"These families do not live from paycheck to paycheck.  They may be using the tax cut to pay off old credit card bills or add to their saving," he said, adding that many affluent workers have jobs that depend on selling products and services to families who are in tight economic circumstances.

Most of the major pieces of the legislation that were disputed are a continuation of current law, including the rates doctors are paid by Medicare, so they go into effect immediately.  There will also be a reduction in the maximum unemployment benefits to 73 weeks from 99 for those hardest hit.  Some of the policy changes associated with what is rumored to be the spending offsets will require time to implement, according to J.D. Foster, senior fellow in the economics of fiscal policy at the Heritage Foundation.

Officials have estimated that another 10-month extension of the payroll tax cut may cost the Treasury about $100 billion.

Though an extra $85 or so a month may sound like small change to some, Foster said the extension of the payroll tax holiday is significant for many families.

"Family budgets across the country are under intense pressure because of the lingering effects of a very weak economy.  Payroll tax relief really helps in this regard," he said.

However, said Foster, another extension does not extend help to the economy overall because there is still no such thing as a free lunch in fiscal policies.

"Families have more purchasing power, but government has to borrow the money that would have otherwise been collected in tax revenue, and that borrowing means dollar for dollar less capital available for the rest of the economy," he said.