Which States Would Be Affected Most by Obama’s Proposal to Lift the Social Security Tax Cap?

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 a new Tax Foundation Fiscal Fact, 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In response to Obama’s editorial in the Quad City Times last September suggesting the payroll tax ceiling be repealed, critics asked how that fits with his promise not to raise taxes on anyone who makes less than $200,000 or $250,000 (Obama has cited both figures).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.

Read the Tax Foundation Fiscal Fact here. More on the presidential candidates’ proposals here and here.