State Of The Union Minimum Wage: Payroll Tax Hike Stands To Discount Wage Boost

The payroll tax increase that went into effect at the beginning of the year stands to offset significantly the President's proposal to raise the federal minimum wage to $9 an hour.

In his State of the Union address, Barack Obama called on lawmakers to increase the federal minimum wage from $7.25. For an employee working a 40 hour work week, the bump would translate to a 24 percent raise to $18,720 a year.

However, because of the payroll tax hike that went into effect on January 1, 10 percent of that raise, or $374, would be lost due to the payroll tax hike, according to a calculator provided by the Wall Street Journal.

The payroll tax increased on January 1, after Congress declined to extend it during fiscal cliff negotiations.

In a state like Connecticut where the minimum wage is currently $8.25, an increase in the minimum wage to $9 an hour would mean an annual raise of $1,560. Roughly 24 percent of that pay increase would be erased by the expiration of the payroll tax cut.

The federal minimum wage of $7.25 is currently in place in 31 states and this is not the first time that Obama has proposed increasing the wage floor nationally. In 2008, the president pledged an increase in the federal minimum wage to $9.50 in order "to make sure that full-time workers can earn a living wage," according to his website. The federal wage floor has not increased since 2009.

Congress's decision to let the payroll tax cut expire in January will do more than decrease your annual income. Chief Economist at Moody's Analytics Mark Zandi has predicted that a higher payroll tax will decrease economic growth by more than half a percentage point this year.



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