State-by-state effects of Obama’s
Social Security wage cap elimination plan

With yesterday’s final primaries, it’s all over but the shouting. Now the real fun begins.

Taxes, as is always the case in elections at every level, will get plenty of attention from Senators Obama and McCain. When it comes to the income tax, the two men come at reform from different directions.

While John McCain wants to permanently extend the current tax rates implemented during Dubya’s presidency, Barack Obama has proposed raising the tax rates on dividends and capital gains and eliminating the earnings cap on Social Security taxes.

I previously blogged about the Obama proposal to lift the wage tax ceiling in Social Security taxes: Political and practical considerations.

Now Gerald Prante, senior economist at The Tax Foundation, has looked at Obama’s plan and ranks, from least to hardest hit, how the states would fare if the proposal became law.

It’s no surprise that states with large populations of higher income earners would take the biggest hits. Prante’s analysis shows that New Jersey, Maryland and Connecticut would bear the brunt of Obama’s suggested Social Security tax hike.

"More than 10 percent of taxpayers in New Jersey would pay higher payroll taxes if the wage tax ceiling were abolished," says Prante. "It would have a much smaller impact in Montana, North Dakota and South Dakota, where fewer than three percent of individuals earn more than the current wage tax ceiling."

Who’s FICA and why is he getting so much of my check? Currently, the wage ceiling is $102,000 for a single worker. That means that the maximum Social Security tax of 12.4 percent for an individual is $12,648. Half of that is paid by the worker, the other half by the employer.

There is no wage cap on the Medicare tax portion, another 2.9 percent, also paid equally by workers and their companies.

Together these taxes are known as FICA, the acronym for Federal Insurance Contributions Act you see on your paycheck stubs.

Self-employed folks also pay FICA taxes as both employee and employer, but get an adjustment on their tax return for half of their self-employment tax amount.

There has always been an earnings ceiling on Social Security taxes; it’s adjusted annually for inflation. The debate over whether that’s good tax policy will continue, regardless of whether Obama or McCain move into the White House.

And just because a president advocates a tax measure, that’s no assurance it will become law. It has to originate in and be passed by Congress first.

But it never hurts to be prepared for tax possibilities, both pre- and post-election.

Social Security taxes by state: Prante has produced a table that shows the state-by-state breakdown of three scenarios under the Obama proposal:

• Completely eliminate the wage ceiling,
  
• Eliminate the ceiling, but with a "donut hole" up to $200,000, and
  
• Eliminate the ceiling, but with a "donut hole" up to $250,000.

The donut hole scenarios are based upon Obama’s pledge not to raise taxes on earners who make less that $200,000 or $250,000 (he has cited both figures). With such a "donut hole," wages up to the ceiling would be taxed as usual, followed by a non-taxable amount up to $200,000 or $250,000, and then all wages above that would be taxed.

That way, says Obama, the wage ceiling can be abolished without increasing taxes on those earners.

With total elimination, 162 million workers would be affected. Slightly more than 10 million, or 6.25 percent, would pay more taxes. With a $200,000 donut hole, 2.43 million would pay more. Almost 1.7 million would pay more with a $250,000 donut hole.

And the numbers show: Here are the 10 states that would be hardest hit, percentage-wise, by Obama’s proposal, full elimination scenario:

And here are the 10 states whose residents, percentage-wise, would be least affected by Obama’s full wage cap elimination proposal:

Click here to see The Tax Foundation’s data for the other 40 states and the District of Columbia, plus the donut hole numbers for all 51 jurisdictions.