Perhaps the least-discussed and least controversial part of the tax deal reached in Washington was the decision to let the employee portion of the Social Security tax rise back up to 6.2 percent of pay, ending the temporary tax cut that had the rate at 4.2 percent. This was inevitable given Social Security's funding issues, but it represents a tax increase on all wage earners with their first paycheck of the new year. Like all of the tax hikes, it will be felt differently in each state. Below is an estimate from the Tax Foundation of the bite for a median-income family in the states where the tax increase will be highest.
As Steve Eide notes below, state and local elected officials chiefly seemed to worry during the negotiations over avoiding the fiscal cliff about potential cuts to state and local aid from the federal government. Their budgets are pinched chiefly because their own tax collections have largely been flat for the past four years thanks to the sluggish recovery. Perhaps state and local officials should be worrying now about the impact of the tax increases on GDP growth and how that influences their own budgets. The Tax Foundation estimates the impact will lower GDP growth by 1.45 percent. Other estimates are lower. Still, while most of the new bite is on high earners, every wage earner will send more to Washington.