Retailers Fear Payroll Tax Will Cut Consumer Spending

4798American workers are opening their first paychecks of the year and finding an unpleasant surprise: The government's take has gone up.  

Kari Barker watches son Kaleb, while Jonathan sits with newborn Mason at their Farmington, Utah, home. (Erik Szylard Daenitz for The Wall Street Journal)
A temporary cut in Social Security withholdings gave Americans hundreds of extra dollars to spend over the past two years. But Congress allowed that break to expire during the wrangling over the fiscal cliff, meaning that Social Security taxes have reverted to 6.2% of salary from the temporary 4.2%.

The noticeable lightening of paychecks as consumers remain tentative threatens to put a drag on economic growth. The effect for companies is that the hit is likely to cement a frugal attitude that led consumers to cut back on eating out and shift to less-expensive store brands.

Kari Barker, an accountant in Salt Lake City, recently received her first 2013 paycheck and realized that she and her husband will take home $250 less every month. The 32-year-old, who works as a financial controller for a medical-devices company, accepted a second job last week doing accounting work for a friend's startup company.

Ms. Barker recently had a second child, who joined the first in day care. She has been planning meals more carefully to spend less on groceries and has switched to less-expensive brands of household and baby items. "I used to be a diapers snob and would only buy Pampers or Huggies," Ms. Barker said. "Now I buy Target's house brand, because it's two-thirds the cost."

Procter & Gamble Co., PG -0.07% which owns Charmin, Pampers and other brands, declined to comment, citing the company's scheduled earnings report this month. Huggies maker Kimberly-Clark Corp. KMB +0.20% also declined to comment.

Roberton Williams, a tax economist and the Sol Price Fellow at the Tax Policy Center in Washington, said the expiration of the payroll-tax cut will leave the average American household with $18 to $20 less to spend each week, or $900 to $1,000 a year.

For the country's consumers as a whole, Mr. Williams said, that is a decline of $120 billion from last year. The total comes to about 0.8% of U.S. gross domestic product and is nearly equivalent to the most recent full-year sales at P&G, J.C. Penney Co. JCP -4.87% and McDonald's Corp. combined.

The payroll break wouldn't have affected Social Security's solvency, at least on paper, because Congress had promised to make up the lost revenue. But many liberal lawmakers had worried that the break could have added to the program's long-term problems.

The impact on the economy now is hard to quantify, because it isn't clear how much of the money in consumers' paychecks was spent and how much of it was saved. Still, "it's a significant amount of money that's being pulled out of people's pockets and not being replaced," Mr. Williams said.


Source: Wall Street Journal | Serena Ng
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