Too Soon To Blame Payroll Tax For Stagnant Retail Sales?

Mon, February 25, 2013 10:52pm

Story by Dan Bobkoff




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Wal-Mart is one of several large retailers that say an increase in the payroll tax may hurt U.S. sales in the months ahead.

For Darden Restaurants, the company behind Olive Garden and Red Lobster, its earnings projections out last week were not pretty. Sales will fall, it said, and company CEO Clarence Otis called higher payroll taxes a "headwind."

After a two-year tax break, the payroll tax, which funds Social Security payments, went back up to 6.2 percent on Jan. 1. The 2-percentage-point increase is an extra $80 a month in taxes for someone earning $50,000 a year.

Other companies, including Family Dollar and Burger King, are also blaming the payroll tax increase for hurting bottom lines. But some analysts say those charges are premature.

"I'm kind of skeptical that anybody can say that with much certainty yet," says Christopher Carroll, an economics professor at Johns Hopkins University. He says that while it's likely smaller paychecks will affect spending eventually, we just don't know yet.

Payroll Taxes, Or General Uncertainty?

Indeed, recent trends are all over the map. Consumer sentiment surveys say we're feeling better about the economy, but unemployment is still high and gas prices have been rising steadily.

"In any given month, or any given quarter, the size of those other effects is likely to swamp just any one effect like the payroll tax," Carroll says.

Wal-Mart is another company pointing to the payroll tax as one reason it expects slow sales ahead. Even so, spokesman Randy Hargrove says, "to date, we're not seeing any measurable changes in our traffic patterns yet." But customers are talking about it, he added.

But just about anything — "from weather to less inflation in food, to what's going on in Washington" — can change how shoppers spend, says Frank Badillo, senior economist with Kantar Retail.

Americans still managed to buy more stuff last month, though the increase was a puny 0.1 percent. Sales started to slow toward the end of last year, before payroll taxes went back up. The issue, Badillo says, was general uncertainty.

"[Consumers] never pulled the plug on their spending," he says, "but clearly all the talk out of Washington had an impact."

Retailers Watching Closely For Signs

Still, the payroll tax remains target No. 1 for some retailers worried about their future. The industry's trade group, the National Retail Federation, released survey results last week that it says showed recent payroll tax changes were heavily swaying shoppers.

"Almost half of consumers, about 45 percent, say that they're going to spend less overall as a result of the new federal tax laws," says Kathy Grannis, an NRF spokesperson.

Look closely at the survey, however, and it never actually used the words "payroll tax" anywhere in its questions. Instead, it asked about what it called the "new Fiscal Cliff tax laws." Some economists are skeptical that many Americans have even noticed their lower take-home pay yet.

At Wal-Mart, the company is watching closely and says it will lower prices if the payroll tax does change how its customers shop.

And customers "may cut back from, say, beef to chicken," says Hargrove.

But that's still an "if." Wal-Mart says it didn't see a noticeable jump in sales when payroll taxes were cut two years ago. In surveys, consumers said they were using the extra money to pay down debt. And if we never spent more to begin with, it's possible we might not cut our spending, either.

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