Obama says his payroll tax cut would mean "$1,500 in your pocket"

President Barack Obama barnstormed Virginia this week, hoping to galvanize support for his proposals to create jobs and further cut payroll taxes.

"What we are proposing," he told an estimated crowd of 1,300 at a high school in Emporia, "is that the payroll tax we passed in December gets extended, gets expanded, and that will mean an extra $1,500 in your pockets compared to if we do nothing."

An extra $1,500 could come in handy. So we decided check out the president’s statement.

First, a little background. The payroll tax is a federal levy taken directly from the paychecks of employed Americans. It’s mainly used to fund Social Security and Medicare.

For two decades, the payroll tax meant a 6.2 percent deduction on annual earnings for most workers. There were limits to the total amount individuals could be required to pay. In 2009 and 2010, the levy applied to the first $106,800 of salary, meaning no one would pay more than $6,621. Employers paid a matching share.

Last December, the levy was cut to 4.2 percent for workers as part of an agreement Obama worked out with Congress to extend income tax reductions passed during President George W. Bush’s administration that critics say favors high earners. The payroll tax reduction is in effect for the duration of 2011.

Last month, Obama proposed slicing the payroll to 3.1 percent for workers next year as part of a $447 billion bill to spur to spur the economy called the American Jobs Act. To help employers, the president also proposed a 50 percent tax cut in the first $5 million of payroll costs for most small businesses.

Obama is accusing congressional Republicans of blocking his package, which would be paid for by increasing taxes on people earning more than $1 million a year. He has vowed to pull out proposals in the Jobs Act -- including the payroll tax reduction -- and send them to Congress as individual bills.

Now, let’s look into Obama’s statement that his payroll tax cut "would put an extra $1,500 in your pocket."

We can do  a rough assessment with some basic math. Our calculations will be based on median income -- the income level that’s exactly in the middle when all incomes are ranked from smallest to largest -- because, unlike the mean (or average), it’s not significantly influenced by a small number of very high earners.

The median U.S. household income in 2010 -- the most recent year available -- was $49,445. Reducing payroll tax rate to 3.1 percent would mean a $1,533 savings next year compared to the levy they paid in 2010, when there was a 6.2 percent rate. That’s a little bit higher than the president’s estimate.

The savings would be greater in Virginia, where the median household income in 2010 was $60,363. Such a family would pay $1,871 less next year than they did in 2010.

If Congress doesn’t act on the payroll tax, then, as Obama noted, the rate will return to 6.2 next year.

Now that we’ve made our computations, we’ll note two reasons why they’re imperfect.

First, not all income is subject to the payroll tax, including interest income, dividends, capital gains, inheritances and Social Security benefits.

Second, not all households include people who are working, and therefore, not all qualify for a payroll tax cut. This includes individuals and couples who are unemployed or retired.

To gauge the impact of these factors, we turned to estimates by the Urban Institute-Brookings Institution Tax Policy Center. It concluded that the average national benefit for households that qualify for this year’s payroll tax cut, with rates set at 4.2 percent, is $934. The center did not do computations for Virginia.

Robertson Williams, an economist with the center, told us the average national savings would increase to $1,446 per qualified household if the rate is dropped to 3.1 percent next year.

According to the center, just under 78 percent of households -- are subject to payroll taxes and eligible for relief. The remaining 22 percent would see no benefit at all.

"I think the president’s figures are reasonable," Williams said.

Our ruling:

Obama said this proposed payroll tax cut "will mean an extra $1,500 in your pocket."

Since early September, he’s been using that number to describe average national savings for households that pay the levy. An economist at the Urban Institute-Brookings Institution Tax Policy Center computes the actual savings would be $1,446.

Of course, Obama was speaking to a crowd in Virginia, where incomes are higher than the national average and the savings from a payroll tax cut would be greater. The president’s statement is certainly in the ballpark and we rate it True.

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