Yes, Your Paycheck is Smaller...And it May Get Worse

by KRISTEN DE PENA | January 16, 2013

If you received your first paycheck in 2013 already, you likely noticed that it is smaller than those you received in 2012. The reason for the 2% decrease in your paycheck is because the Social Security Payroll Tax reduction from 2011 expired on December 31, 2012. And it isn't just individuals who must reconfigure budgets, the states are looking at smaller "paychecks" as well.

All taxpayers who earn income subject to Social Security taxes saw decreased take-home pay as withholding rates for employees and self-employment tax returned to the original levels of 6.2% and 12.4% respectively. The "Fiscal Cliff" deal extended many tax breaks, including tuition and fees deductions, and state and local sales tax deductions through 2013, but individuals are not out of the woods. If you qualify for these tax benefits, you can choose to withhold less federal income taxes, thereby increasing take-home pay, but you may end up owing taxes in 2013, rather than receiving a refund.

The burden on taxpayers' pocketbooks may get worse when states are forced to reevaluate spending in light of decreased federal funding. In 2011, forty-two states received more than 1/3 of their general funds from the federal government. Mississippi received nearly half (49.01%) of their general revenue from the federal government, the highest percentage in the nation. Louisiana received the second highest percentage, relying on the government for 46.52% of general revenue. Alaska, the state receiving the lowest percentage of funding from the federal government, still relies on federal funds for 24.01% of funding for state programs. Comparatively, in 2008, Mississippi received 46.76%, Louisiana received 46.22%, and Alaska received just 13.53%. See data below.

Despite heavy reliance on federal funding, and the increasing likelihood that the funding will disappear, most states seem unprepared for the possibility of drastic cuts. States should respond to the risk of a significant reduction in federal funds by setting aside funds and reviewing spending.

What does this mean for taxpayers?

If your state doesn't plan for a dramatic decrease in federal funding (and even if they do), many state programs will take a financial hit, and will be forced to decrease or eliminate services and funds available to citizens in need.

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