Along Pennsylvania Avenue looking toward the U.S. Capitol in Washington.
(Photo: Tim Sloan, AFP/Getty Images)
A payroll tax increase of 2 percentage points has hit workers who have received their first paychecks of the year, and has many determining how they will cut back in 2013.
The tax increase came when Congress decided not to renew a temporary payroll tax reduction as part of the fiscal cliff negotiations at the end of December. The rate returned to 6.2% as a result.
While the increase won't likely have a significant impact overall on the economy, it could change buying habits and where people choose to shop, especially for lower-income households, economist Joel Naroff says.
"The people at the lowest incomes are going to be the most stretched, the least able to take it out of savings and sustain their spending pattern," says Naroff, president and chief economist at Naroff Economic Advisors in Holland, Pa.
Nearly a third of store managers say shoppers are cutting back on spending due to the payroll tax increase, according to a survey by retail industry research firm Merchant Forecast of 52 store managers in malls across the country. The survey was conducted the second weekend of the month and store managers based responses on foot traffic and sales figures, among other things.
That could be a good thing for discount retailers as more consumers look to them for savings. Dan Hess, CEO of Merchant Forecast, suspects off-price stores such as Ross and T.J. Maxx will gain customers as people "trade down" to less expensive stores and brands.
And Naroff predicts major retailers such as Walmart and Target that also offer grocery items could see an increase in those purchases as consumers seek discounts or switch to generic over brand-name products.
Sharon Morgan is one such shopper. The 73-year-old part-time pastoral assistant says she'll likely start shopping more at discounters such as Costco instead of neighborhood markets.
"The tax increase will greatly affect how and where we spend our money," says Morgan, who lives in Oak Harbor, Wash.
Others say the tax increase won't affect their spending choices, and Naroff agrees that the increase won't make a huge difference for most middle- to upper-income families.
Still, "anytime you take dollars out of the economy you have to anticipate there will be some drag," says Phil Noftsinger, president of CBIZ Payroll, a company that manages payroll processing. "I think it's going to come as a pretty big surprise (as workers collect paychecks)."
By Hadley Malcolm, USA TODAY