Sales forecasts lower amid payroll tax increase

February 28th, 2013

On Jan. 1 of this year, a payroll tax increase was put into effect. The payroll tax increase put the payroll tax that funds Social Security, among other things, up to 6.2 percent from 4.2 percent. This was due to the expiration of what is referred to as the “payroll tax holiday.”

A hot topic has been the recent end of the payroll tax holiday and what implications it has on consumer spending going forward, as consumers are already faced with challenges of increasing gas prices, stagnant wage growth and the general concern of the job market.

The payroll tax provision was enacted in 2010 and cut the share paid by workers to fund Social Security out of their paycheck from 6.2 percent to 4.2 percent. This temporary payroll tax holiday was designed to “help pull a stagnant economy out of the doldrums” by increasing consumer spending, which accounts for roughly 70 percent of gross domestic product, according to The resumption of the levy at the beginning of 2013 brings the payroll tax up to 6.2 percent, and takes away the annual $1,000 tax break that consumers who make the median income of about $50,000 were receiving.  Citigroup estimates that the payroll tax increase will shift $110 billion overall out of consumers’ hands this year.

Now that the payroll tax has increased, many retailers, restaurants and companies that sell consumer goods are lowering sales forecasts and adjusting their sales and marketing strategies, according to The Wall Street Journal. These adjustments are being made in anticipation that consumers, now with smaller paychecks, will dine out less and make less expensive purchases.

Wal-Mart Stores Inc., the world’s largest retailer, is one notable example of a retailer that has expressed concerns about consumer spending going forward. According to The WSJ, Wal-Mart has lowered their sales forecasts and has “stocked more of its shelves with cheaper products and smaller-size packages of diapers, toilet paper and snacks.” The WSJ reported earlier this week that grocery manufacturer Kraft Foods Group Inc. and meat supplier Tyson Foods Inc. are introducing more lower-priced products to help restaurants and supermarkets “adapt to the consumer spending downshift.”

Burger King Worldwide Inc. Chief Financial Officer Dan Schwartz said in an interview with The WSJ, “When people look at their paycheck and see less money, it obviously impacts their mind-set about spending.”

According to a survey by the National Trade Federation, a trade group, less take-home pay is causing 45.7 percent of consumers to curtail spending. The survey also said that “a quarter of consumers are delaying big-ticket purchases, a third are reducing restaurant visits and about a fifth of shoppers are spending less on groceries.”

While the payroll tax raise may have a negative effect on consumer spending going forward, the “spending letdown” has been remarkably small so far. USA Today reported recently that sales of gasoline are up 2.8 percent so far this year, measuring by gallons, and auto sales have climbed up 14 percent from a year ago.

Consumers are expected to experience a payroll tax spending shock. This shock will hopefully wear off as consumers get accustomed to the higher tax rate. For the sake of the overall economy, it would be beneficial for adverse affects from the payroll tax to not harm consumer spending on a large enough scale.

Information from The Wall Street Journal, NBC News and USA Today was used in this report.