Higher federal payroll tax not a major hit but tens of dollars less a paycheck means more to some

 

The higher federal payroll tax that kicked in earlier this year was seen as a major hit to consumers' wallets that could become a significant drag on the economy. 
 
But so far its ramifications seem to be less than some feared. While some large retailers have attributed a dip in sales to the tax, which rose by 2 percentage points in January, the effect so far is decidedly mixed.
 
Jason Smith, chef and owner of Raleigh, N.C., restaurants Cantina 18 and 18 Seaboard, said that although revenue is up at both his restaurants this year, he thinks they might be doing even better if not for the jump in the payroll tax.
 
"I certainly don't think a higher payroll tax has helped me grow my business," Smith said, but noted that analyzing the whys and wherefores of customer traffic is purely guesswork on his part, and said an especially cold spring likely kept some people from dining out.
 
About a mile south of 18 Seaboard, Taiseer "Taz" Zarka, who owns two convenience stores in downtown Raleigh, says the tax hasn't hurt his business so far.
 
Zarka takes the view that the tax change may ultimately benefit him, as budget-conscious consumers who forego eating out for lunch may end up at one of his stores instead.
 
"If I'm hungry and I don't want to spend, I can buy potato chips for $1 or a Snickers candy bar for $1 and kill the hunger until I get home," he said. "It may be bad for restaurants, but it's good for us."
 
A rise in the payroll tax was considered a serious threat to the fledgling economic recovery because it would immediately take a bite out of so many consumers' paychecks. Funds from the tax go to Social Security. For a person who earns $50,000 a year and is paid twice monthly, that's $38.46 less in their paycheck; someone earning $35,000 would see their twice-monthly paycheck reduced by $26.92.
 
"This tax hits everybody," said Harry Davis, economist for the N.C. Bankers Association and a professor at Appalachian State University. "If you're making 50,000 bucks a year, this tax costs you $1,000. And it comes right out of your check."
 
Although the higher tax affects everyone, its impact is greatest on lower-income workers who are more likely to live paycheck-to-paycheck.
 
"It's clearly a regressive tax," Davis said. "It hits the poor harder."'
 
But despite the smaller paychecks, a U.S. Commerce Department report issued this month found that consumers spent more at retailers in February. Retail sales in February were 1.1 percent higher than January and 4.6 percent better than a year earlier.
 
For many businesses, it may be too early to fully grasp how the payroll tax increase is altering consumer behavior. 
 
What we do know is that 15.6 percent of consumers surveyed recently by RBC Capital Markets reported they are cutting back on eating out because of the payroll tax.
 
The survey found that restaurants were the No. 1 category for payroll-tax-driven cutbacks in spending, followed by: clothes purchases, where 13.2 percent are cutting back; vacations, 11.3 percent; movies, 9.6 percent; and grocery store purchases, 8.8 percent.
 
RBC analyst Larry Miller wrote in a research note that sales at restaurants open at least a year fell 1.8 percent in February, the first downturn in three years. Casual dining sales fell 4.9 percent.
 
.Piper Jaffray analyst Peter Keith, who follows Family Dollar Stores, expects customers of the 7,500-store chain are paring back on their spending due to the higher payroll tax.
 
"The quick knee-jerk reaction would say that it is going to impact discretionary spending the most," he said. "That would be some of their items like seasonal, home and apparel, or toys for that matter."
 
But, Keith added, "even in their food or consumables category, one could argue there are discretionary components there. For example, there are desserts or snacks or beverages that may be cut back on if someone's overall budget is reduced."
 
Michael Walden, an N.C. State University economist, noted that payroll taxes were lowered during the depths of the recession to put more money into consumers' pockets. The cutback was always meant to be temporary, he said, which is why it was allowed to expire.
 
Walden projects that the higher payroll tax will be outweighed this year by the recovery of the housing market nationwide and the comeback of consumer spending.
 
"Not all consumers, but enough consumers, have gotten their debt load down and their net worth up and they're in a position to buy those big-ticket items - cars, homes, furniture, (electronics) - that they have really refrained from buying in the last four years," he said. "The net effect going forward is still going to be an economy that I think is going to accelerate in economic growth." 
 
(Contact Raleigh News & Observer reporter David Ranii at dranii@newsobserver.com.)
 
(Distributed by Scripps Howard News Service, www.scrippsnews.com.)
Print this article Back to Top

Comments