Payroll Tax Takes a New Bite

American workers are opening their first paychecks of the year and finding an unpleasant surprise: The government’s take has gone up.
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 start up 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), 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) 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) and McDonald’s Corp. (MCD) 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.
The tax hit could affect companies such as consumer-goods makers, clothing retailers, department stores, food producers, grocery stores and restaurants. Some companies said it is too soon to estimate the potential impact of the tax break expiration on their sales and profits, but it nevertheless has been a nagging concern.
Foot Locker Inc. (FL) Chief Executive Ken Hicks said in November that the payroll tax increase was “of particular concern,” even though the shoe retailer has had 11 consecutive quarters of sales and profit growth.
“Anything that takes money out of the pockets of our customers creates a more challenging business environment,” he told analysts during the company’s earnings conference call.
Executives at Sanderson Farms Inc. (SAFM), the country’s third-largest chicken producer, said the payroll-tax change and any other activity in Washington that could damp consumer spending might reduce chicken prices, which were on the upswing recently.
“When people tighten their wallets and cut back on eating out, it hurts our industry,” said Mike Cockrell, chief financial officer of the Laurel, Miss. He pointed to the experience in August 2011, when political wrangling over the debt ceiling took a bite out of consumer confidence and led to a drop in sales for many restaurants and other companies.
The payroll tax’s impact is likely to be uneven. Sales of big-ticket items like cars, flat-screen television sets and computers may not be hit. But consumers are expected to trim spending on everyday products and clothing.
Edward Riggle, a 61-year-old in Virginia Beach, Va., said he noticed a nearly $40 increase in the amount of Social Security tax withheld on his recent pay stub. Mr. Riggle, a Vietnam War veteran who retired from the Navy in 1991 and now works at a military call center, calculated that he will pay $1,036 more in Social Security tax this year, a large unexpected decrease in his take-home pay.
In response, Mr. Riggle said he changed the withholding amounts for his federal and state taxes to make sure no excess cash is kept from his paychecks and is looking to save money on regular purchases.
On a recent shopping trip, Mr. Riggle and his wife decided not to buy their usual Charmin toilet paper and Purina One dog food, choosing less-expensive versions instead.
Nestlé SA (NESN.VX), which owns Purina, didn’t respond to a request for comment.
Sung Won Sohn, an economist and vice chairman of budget-fashion chain Forever 21 Inc., said companies that make or sell lower-priced items may not see much of a hit as shoppers get more stingy. “It could benefit us as people trade down,” he said.
Some consumers won’t cut corners on essentials, though the higher taxes will mean less money for extras like eating out. Karen Fuller, a 35-year-old mechanical engineer and mother of two children in Bellingham, Wash., said she never worked the additional cash from the tax break into her family’s budget, because she knew it was temporary.
“We didn’t need the extra money, so we spent it going out to eat, on shopping and baby stuff,” Ms. Fuller said. “I didn’t want to be dependent on anything that might have to go away if the money went away.”
—John D. McKinnon contributed to this article.


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