The largest economic impact of the budget accord will come from ending a two-percentage-point payroll tax cut, a move that will shrink paychecks for U.S. workers immediately even as most income tax cuts that expired Dec. 31 are being extended permanently.
The payroll cut’s lapse will pull more than $100 billion out of the economy in 2013 and is the primary reason why 77.1 percent of U.S. households will face higher taxes this year, according to the nonpartisan Tax Policy Center in Washington.
The Republican-controlled House yesterday almost unraveled a bipartisan agreement brokered over the waning days of 2012 by Vice President Joe Biden and Mitch McConnell of Kentucky, the Senate Republican leader. The Senate passed that bill 89-8 in the first hours of Jan. 1. In last night’s House vote, 85 Republicans and 172 Democrats voted for the measure, while 16 Democrats and 151 Republicans opposed it.
Compared with continuing 2012 policies, the agreement would increase taxes by $620 billion over the next decade, according to the White House. The federal budget will be $4 trillion bigger than projected had all the scheduled tax boosts been retained.
Republicans claimed a victory because the bill ends the temporary nature of most of the tax cuts that President George W. Bush campaigned on in 2000 and were scheduled to lapse at the end of 2010 and then again in 2012.
“We’re making permanent tax policies Republicans originally crafted,” said Representative Dave Camp, a Michigan Republican and the chairman of the tax-writing Ways and Means Committee.
In addition to tax increases on top earners, the bill extends expanded unemployment benefits and continues refundable tax credits for low-income families and college students. It would also delay by two months automatic cuts scheduled to start this month, offsetting the $24 billion cost with a blend of additional revenue and spending reductions, half of which would come from defense.