Payroll Tax Hike Erases Paycheck Gains For Minimum Wage Workers

WASHINGTON -- Many of the nation's poorest workers were looking forward to a modest pay hike on New Year's Day, when 10 states implemented higher minimum wages.

In the end, those workers' increased earnings may have lasted all of a few hours.

The deal approved by the House of Representatives late Tuesday to avert the so-called "fiscal cliff" did not include an extension of the payroll tax holiday, effectively hiking by 2 percent workers' payroll tax contributions which help pay for Social Security. For many minimum wage workers who are receiving a wage increase this year, the higher payroll tax will offset much or all of the potential gains they anticipated in the new year.

According to the Wall Street Journal's payroll tax calculator , a worker who makes $15,000 a year -- roughly the salary of a full-time, minimum-wage worker in most states -- will pay an additional $300 in payroll taxes this year under the deal struck by Congress and the White House.

That $300 is roughly equal to the additional earnings that minimum wage workers would have gained in most of the 10 states boosting their wage floors, according to an analysis of the increases by the National Employment Law Project (NELP), an advocacy group for low-wage workers.

In Arizona, for instance, the 15-cent wage hike to $7.80 translated into an annual raise of $320 for a worker maintaining a 40-hour week. In Colorado, the 14-cent raise to $7.78 meant an additional $310.

The higher payroll tax will wipe out the minimum wage gains and then some in Missouri and Vermont, where NELP projected additional earnings of $190 and $240, respectively, for full-time earners. Other states' minimum wage raises, including Florida, Montana, Ohio, Oregon, Rhode Island and Washington, ranged between 10 and 35 cents per hour, or $190 to $510 annually.

The federal minimum wage of $7.25 prevails in 31 states that do not have higher state minimum wages. Most of the raises this week in state minimum wages were due to cost-of-living adjustments, which tweak the minimum wage each year to account for inflation. (The federal rate has no such adjustment.) The 10 increases will directly benefit roughly 855,000 workers , according to the left-leaning Economic Policy Institute. Opponents of higher minimum wages, however, argue that many workers' wage gains will be offset by lost hours due to increased labor costs.

As HuffPost reported Tuesday, the end of the payroll tax holiday, which dropped the payroll tax from 6.2 to 4.2 percent, was among the least-discussed but perhaps most economically consequential elements of fiscal cliff negotiations.

First enacted in 2010 and later extended, the payroll tax holiday was meant to be a temporary stimulative measure. While lawmakers on both sides of the aisle expressed concern that extending the payroll tax cut further could threaten Social Security funding, many economists have warned against reducing workers' spending power in a still-weak economy.

Mark Zandi, the chief economist at Moody's Analytics, has estimated that the higher payroll tax for 2013 could reduce economic growth by more than half a percentage point.