Tax Foundation Study: Obama Plan to Lift Social Security Wage Tax Ceiling Would Hit High-Income States

June 03, 2008

Washington, D.C., June 3, 2008 - New Jersey, Maryland and Connecticut lead the list of states that would bear the brunt of the Social Security tax hike that Sen. Obama has suggested.

In Tax Foundation Fiscal Fact, No. 128, economist Gerald Prante ranks the 50 states from least to hardest hit, assuming Sen. Obama's proposal to lift the wage tax ceiling becomes law.

"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."

The wage tax ceiling was $94,700 for a single person in 2006, the most recent year for which tax data is available. In 2008, the ceiling is $102,000, so the maximum Social Security tax for a single person is 12.4 percent of the first $102,000 in wages, or $12,648.

In response to Obama's editorial in the Quad City Times last September suggesting the payroll tax ceiling be repealed, critics asked how that fits with his promise not to raise taxes on anyone who makes less than $200,000 or $250,000 (Obama has cited both figures). Obama's response, from his Web site, is, "We may want to include a ‘donut hole' to ensure that lifting the payroll tax cap does not ensnare any middle class Americans."

The "donut hole" idea is that 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.

"It's dubious whether anyone who earns between $100,000 and $250,000 should be called ‘middle class'," comments Prante, "because only about two percent of Americans earn more."

Of more concern to Prante is the prospect of taxing high-wage income at rates well above 50 percent. Obama has called for the top federal income tax rate to revert from 35 percent to 39.6 percent. Add to that an uncapped payroll tax rate and the typical state's top income tax rate, and the result is a top marginal tax rate of between 55 and 61 percent.

"When government takes 60 cents of a high-income person's next dollar of wage income, the taxpayer has less incentive to work but more incentive to game the tax system with complex tax planning," says Prante.

The new study, "Obama's Plan to Abolish the Social Security Wage Ceiling: A State-by-State Breakdown," is available online at

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