PORTLAND, Maine — While political drama over the extension of the payroll tax cut plays out on Capitol Hill, the lack of a long-term solution would be felt in communities in Maine and around the country.
The Senate passed an extension of both the payroll tax and unemployment benefits, but the deal had been blocked in the House by the Republican majority. House leaders late Thursday reached an agreement on a two-month extension, with further House action slated for Friday.
Lawmakers are then supposed to work on a yearlong extension in the new year.
Without long-term action, the payroll tax paid by 160 million workers nationwide would rise by 2 percentage points back to 6.2 percent. That translates to about $1,000 a year less in the pockets of people making $50,000.
In Maine, said Garrett Martin, executive director of the Maine Center for Economic Policy, as many as 800,000 people would be affected, resulting in a loss of $400 million in income next year. Someone earning less than $20,000 will see their taxes go up by as much as $400 while someone earning $50,000 a year will see their taxes increase by $1,000, Martin said.
“The economic consequences of this for families struggling to make ends meet during a down economy are huge and will impact Maine’s economy more broadly. Without this additional income, Maine people will have less to spend on food, clothing and other goods and services,” said Martin. “As this ripples through the economy, it will result in greater job loss. This is particularly troubling in light of recent employment figures showing that since January of 2011, Maine has lost an additional 4,500 jobs.”
The basic concept is that as people have less disposable income — upward of $400 million in Maine — they spend less. The effect spreads, with businesses making less in sales, and so becoming more cautious in making new hires — which keeps more people unemployed, and not spending money locally.
There’s no numbers around what a lack of extension would mean for state revenues, said Michael Allen, director of economic research for Maine Revenue Services. But there would be an impact, he said.
The economic forecast developed by the state’s Consensus Economic Forecasting Committee and released on Nov. 1 relied on two major forecasters, said Allen: Global Insights and Moodys.
Both groups assumed the payroll tax cut would be extended for one more year — and that unemployment benefits would also be extended for another year, said Allen.
“That played into their thinking about national economy and, ultimately, the state’s economy,” said Allen. “The two forecasters made it clear at the time that if Congress does not extend those two stimulus programs that they will downgrade their forecast of the U.S. economy for 2012, and that will certainly flow through to the Maine economy.”
The Nov. 1 forecast is used by Maine Revenue Services to build its revenue projections for the state. The consensus forecast sees personal income rising 3 percent in Maine in calendar year 2012. Revenue Services sees general fund revenues increasing by $10.6 million in fiscal year 2012 (which ends June 30), and decreasing by $9.6 million in FY2013.
That, as Allen explained, is if the payroll tax and unemployment benefits extension pass.
If they don’t pass, or if Congress is still arguing about it early in 2012, “I think you’ll see a more pessimistic economic forecast released.” The consensus group releases another forecast Feb. 1, followed by a revenue forecast March 1.
The forecast for 2012 remains muted, said Allen, because much of the federal stimulus money that went into the economy in 2009, 2010 and parts of 2011 is now gone.
“The payroll tax cut and the extended unemployment benefits are kind of a way to cushion that blow a little bit,” said Allen. “If those don’t get extended, you’re kind of talking about a double whammy.”
Maine’s four members of Congress have supported extending the payroll tax cut.
“Letting the payroll tax cut expire amounts to a tax hike of about $40 a week on the typical family. That’s $40 that Maine families can’t spend on heating oil or groceries or going out for pizza,” said 1st District Rep. Chellie Pingree, a Democrat. “Not only is that tough on families that are already struggling, it takes a big chunk of money out of the local economy.
It was irresponsible of the Republicans to block a vote on the bipartisan compromise that would have extended this tax cut.”
Her Democratic House colleague, 2nd District Rep. Mike Michaud, noted that taxes would be raised and thousands of Mainers would lose critical unemployment benefits.
“We’re in a difficult economy right now, and it’s exactly the wrong time for Washington to begin playing politics with people’s lives,” he said.
Sen. Susan Collins, who voted for the extension, along with follow Republican Sen. Olympia Snowe, said she would prefer a yearlong extension, rather than a short-term fix.
“However, I agree with the Republican leader that the House should immediately pass the two-month extension of the payroll tax bill, as the Senate has done,” Collins said. “I also agree that the majority leader should quickly agree to work with the House to negotiate a long-term extension.”
And Snowe suggested that President Barack Obama and congressional leadership should cancel the scheduled recess for January “so that we can hit the ground running on forging an ironclad, long-term solution on this and so many other critical issues for the nation — so we don’t repeat 2011 where we failed to begin to tackle issues at the beginning of the year such as a federal budget, our deficits and debt, and the payroll tax extension.”
Martin, from the Maine Center for Economic Policy, noted that the Senate version of the extension bill provides important benefits for small businesses as well. The Senate bill will cut the taxes of every small business, said Martin, and employers would receive a tax holiday on half of their 2012 Social Security taxes on the first $5 million in payroll. If employers create jobs, they would pay no Social Security taxes on the first $50 million in increased taxable payroll, he said.
“The effect of these provisions is huge, particularly when combined with the proposed extension of unemployment benefits,” said Martin. “At a time when people are struggling to make ends meet and businesses are wrestling with an already uncertain economic future, we should be doing everything we can to jump-start the economy and keep it running on all cylinders.”