How the Fiscal Cliff Deal Hurts Consumers

Consumers' budgets will be squeezed thanks to a payroll tax hike.

New tuition announcements may help some families keep more money in their wallets next fall.

If your salary is $35,000, you will bring home $700 less this year thanks to the fiscal cliff deal.


An eleventh hour deal prevented the nation from plunging over the fiscal cliff Tuesday, but most Americans will still be stuck with higher tax bills this year.

That's because while Democrats succeeded in raising taxes on the nation's top earners, lawmakers failed to renew the payroll tax cut, which means nearly every worker will have less take-home pay in coming months.

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For the past two years, withholding taxes for social security purposes were temporarily cut from 6.2 percent to 4.2 percent in an effort to give households more disposable income to spend and boost the struggling economy.

Following the fiscal cliff deal, that withholding will revert back to 6.2 percent, and workers will "probably notice it," says Joe Rosenberg, research associate at the Tax Policy Center.

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For people or households earning $35,000 in wages, an extra $700 will come out of take-home pay annually, amounting to about $58 less per month. Going up the income ladder, those making $50,000 in wages will have an extra $1,000 annually, or about $83 a month, withheld from paychecks.

What's $58 worth of monthly expenses? Here's a look at what could be cut out of household budgets in 2013 as a result of the payroll tax hike:

Pizza night: Delivery for a medium Pizza Hut pepperoni pizza is $12.50 before tax and tip according to the restaurant's website. At that price, $58 would buy four pizzas.

Movie night: $58 would fund about 7 movie showings at average movie ticket prices, which were just under $8 in 2011, according to the most recent data from the National Association of Theatre Owners.

Breakfast goodies: With food prices already expected to increase in 2013 thanks to this summer's drought, less disposable income will put more strain on grocery budgets, especially for lower-income households. In terms of milk, $58 would buy about 16 gallons of milk, according to the latest average price data from the Bureau of Labor Statistics.

Road trips: Although gas prices are falling, at about $3.29 a gallon on average, fuel costs still make up a big part of household budgets. A 2012 Toyota Camry has a 17-gallon fuel tank, meaning that at current prices, consumers will have to find the funds for one additional fill-up per month.

New clothes: $58 would buy almost 4 pairs of Old Navy's skinny jeans for girls.

But if that money isn't going into consumers' pockets, it's not being spent, and that could have serious consequences for the nation's economy.

"When we talk about the impact of tax changes, most economists would probably agree that the social security [payroll] tax has the biggest impact of all," says Barry Bosworth, an economist at The Brookings Institution. "It's targeted toward a group of people who would [otherwise] likely be spending that money."

Just how big of an impact the rollback in the payroll tax cut will actually have on the broader, heavily consumer-spending driven U.S. economy remains to be seen. According to Bosworth, the combined annual impact of the cut is about $100 billion. Together with unemployment taxes—which were extended in the cliff deal—that figure swells to $150 billion, just under 1 percent of total gross domestic product.

"There will be a very observable impact on the economy," Bosworth says of the payroll tax withholding increase. "[Economic] growth is going to be a little slow."

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Meg Handley is a reporter for U.S. News & World Report. You can reach her at and follow her on Twitter at @mmhandley.