Smart TaxesSmart Taxes

Workers feel tax hike in their paychecks

Social Security taxes are back up to 6.2% from 4.2%, which is cutting take-home pay. That could lead to consumers spending less and slowing the economy.

By MSN Money Partner Jan 15, 2013 12:07PM

This post is by Serena Ng of The Wall Street Journal.

 

Close-up of a person using a calculator in a supermarket (© George Doyle/Stockbyte/Getty Images)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 withholding 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.

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 diaper snob and would only buy Pampers or Huggies," Barker said. "Now I buy Target's house brand, because it's two-thirds the cost."

 

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, 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 Procter &Gamble, J.C. Penney and McDonald’s 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," Williams said.

 

The tax hit could affect companies such as consumer-goods makers, clothing retailers, department stores, food producers, grocery stores and restaurants. Many of these companies had better sales, profit growth and improved pricing trends going into the end of last year, and some could see renewed sales pressure as consumers, particularly in lower-income households, curtail spending. 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 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, 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 company. 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.

 

The higher payroll tax comes as up to a third of all shoppers already are searching for store brands to save money on everyday items, according to a recent survey by market-research firm Symphony IRI Group.

 

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, which covered two weeks through early January. 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, 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, Riggle and his wife decided not to buy their usual Charmin toilet paper and Purina One dog food, choosing less-expensive versions instead.

 

Sung Won Sohn, an economist and vice chairman of budget-fashion chain Forever 21, 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," 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.

 

More from The Wall Street Journal and MSN Money:

 

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70Comments
Jan 19, 2013 11:11AM
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Taxes on sales commissions are even higher, which is standard. However my last commission check for 2012 was taxed at a rate of 39%, all taxes considered fed, state, medicare, social insecurity. My first commission for 2013 was taxed at 59% WTF! 59%. 
Jan 19, 2013 11:04AM
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This is a problem created by both sides. Those of you who are fixated on pointing the finger solely at libs or at cons are missing everything. Regardless of what party is in office or who controls Congress, the middle class has been collapsing every single year for many years, across many administrations. Wake up! Problems are only going to worsen as Bernanke has been allowed to print money non-stop for years (further deflating our dollar) which will cause higher and higher interest. Worse yet, we have a phony unemployment rate as people whose benefits have expired and no longer account for unemployment figures; yet the Fed said when unemployment reaches 6.8% I believe, then they will raise interest rates. I have news for you, REAL UNEMPLOYMENT IS AROUND 22% still today. Have you really seen enough job growth in comparison to new unemployment filings to bring our numbers down the the 7+% we are at today? No you have not. Brace yourselves because the attack on the middle class is only deepening. Soon we get to pay for health care for those who aren't doing anything for themselves and yet there are no controls in place to offset the higher cost of living. Gas/oil is overpriced, food, housing etc. Back when tax rates were 50-90% it was ok because a house cost $20,000 and a car cost  $1,000, a loaf of bread was 20 cents etc. We are going to take it in the rear and this is the happeing regardless of what party has "control". Good luck.
Jan 19, 2013 10:37AM
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Unless you were an ostrich and kept your head buried in the sand, this should not come as a surprise. The currently elected have had from the beginning wanted to hurt those who work and give to those that don't. There are so many loop holes in our Social Security system. If we quit giving it to people who have never paid into the system or better yet, foreigners who aren't even citizens we would save more than 30 billion a year.

I hope this wakes up the citizens of the United States. Enough is enough. Just wait until your new taxes, I mean fees for Obama care start up. We are becoming more socialist all the time.

Jan 19, 2013 9:24AM
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Add the fact that if a person DOESN'T have health insurance it will soon cost about $600 a year.
Jan 19, 2013 9:09AM
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We didn't elect the President....those sitting on the electoral college panel did. We DO elect the Senators and Congressmen however. Something is definitely wrong in Washington. I keep hearing Obama say "The American people want this or that" "The American people support me in this". I sure as hell do not support Obama in ANYTHING. I have not responded to any POLL or QUESTIONNAIRE. Nobody has emailed or called me to ask my opinion on anything. Where do these pollsters get this information? We all know that the media MUST report as our Government instructs them to because the corporations that own the T.V. networks also have large contracts with the Government. Media is in bed with the Government, so how could we expect them to report truthfully? I don't believe for a minute that he was elected legally the first time, and with 6 states reporting tampering with the voting machines in Obama's favor, as well as 19 states reporting MORE than 100% of registered voters, as well as people being interviewed across the U.S. bragging that they had voted 5 and 6 times....it is obvious to me that the election was rigged.
Jan 19, 2013 8:40AM
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the biggest crybabies are the people with the biggest paychecks, at $300/wk it's only a $6 increase. 
Jan 19, 2013 8:40AM
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I am just very happy to be employed full-time after working part-time for the past two years.  The economy is still not where it should be regardless of a hike in social security taxes and I think people need to take a closer look at what they have and be grateful for it, I have to be confident that their could possibly be a reason to this ryme.

 

Jan 17, 2013 2:45PM
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YOU LIBS WILL MAKE ANY FAIRY TALE RIDICULOUS EXCUSE FOR OBAMA AND DEMOCRATS!

I GUESS YOU LEARNED FROM THE BIAS MEDIA LIKE PMSNBC! AS MANY FAILURES AND BIG

SCANDALS THIS GUY HAS GOTTEN OFF LIKE OJ! YOU CAN SAY ITS NOT A TAX INCREASE BUTT IT IS FOR THOSE OF US WHO WORK! TAXES ARE TOO HIGH ALREADY! TAXES COMING

OUT OF MIDDLE AMERICA'S ****! BUT HE GAVE TAX BREAKS TO HOLLYWEIRD AND GE AND

GMC AND BIG UNIONS AND MORE GREEN ENERGY AND YOU AGREE WITH THAT! MORONS!

AND HE LIED! HE SAID NO TAX INCREASE! NO TAX? IT'S LIKE CLINTON WITH HIS STUPID

WHAT DOES THE WORD 'THE' MEAN? YOU LIBS ARE NOTHING BUT FING LYING TRASH and

YOUR ALL JUST LEFT WING LIBERAL SOCIALIST ANTI AMERICAN GARBAGE!

Jan 16, 2013 3:52PM
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Hopefully during the 2 year SS tax break, those who are still working, used the money to pay down debt and didn't just spend it.  But given the trillions of dollars of debt Americans carry, I doubt it.

Besides this is just more MSN and OBAMA shuck and jive calling it a tax increase.  All it did was make the deficit larger than it would have been had they continued the tax in the first place.  It was just a raid on the SS trust fund for future retirees.

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Maybe the President will increase the COLA for Seniors now.
Jan 16, 2013 2:19PM
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It's a big hit to many and certainly unwelcome.  But for the record: many US citizens and

certainly most immigrants live on skeletal incomes compared to the affluent, so

there is room for frugality. I'm retired and now self-enforced to accept a limited income.

I relearned how to live because I retired;  i relearned how to respond to certain others

because I retired; I relearned how to consume because I retired; I relearned how to

leisure, consume, save, worry, enjoy, appear and appreciate because I retired.  Yes,

all of that to get by on a fixed monthly income that was roughly one-quarter my previous.

 

Second-hand? Is there another choice?  Bulk purchases but only when merchandise

(food) is reduced, labor-making selections (skin those bones folks), home-made and

repaired, reduced, substituted, restored and/or anything except like I lived 50 years

prior to retiring. Delayed consumption until the 'season' or mood has passed is routine.

Had I lived so basically from starting to work at age 16, I would now have much more

upon which to draw HAD I ALSO LEARNED HOW TO ECONOMIZE, SACRIFICE, DO

WITHOUT AND BANKED (INVESTED) THE DIFFERENCES. I didn't and today I am

in a different class than that which I entered at age 20 -- I've descended.

 

My life snow is almost content so it's not as though I'm in pain but it could be better.

Rethink what could be done with your opportunities, funds and contacts and react.

 

   

Jan 16, 2013 1:40PM
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Jan 16, 2013 1:13PM
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If the temporary tax cut had never happened, nobody would be complaining now. Oh, the irony!
Jan 16, 2013 12:33PM
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Please! No more "temporary " tax cuts used to buy elections.

 

Since when is an end to a "temporary" tax cut  a tax increase?

Jan 16, 2013 12:33PM
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People have nobody to blame but themselves.They elect politicians to bring home the

pork and now the bill is due.The Congress has about a 9% approval rating and yet

98% of them get re-elected.Blame youself.

Jan 16, 2013 11:33AM
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A bit funny how the social security increase back to original is not a tax hike but Obama said a million times that Republicans were risking a tax hike on the poor and middle class just to save the rich. Now are tax cuts expiring a tax increase or not? Don't flip-flop to suit your cause.
Jan 16, 2013 8:58AM
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There was NO TAX HIKE. Taxes were restored to the amount they are to be as specified in the SS laws. Stop lying just to make news that does not exist.
Jan 16, 2013 6:20AM
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Yo idiots it just went back to where it was ! Raising a tax from a tax cut is NOT an increse..Look at the tax cuts from Bush ! They are only going to where they were. And the economy was ripping in the 90s .. And Clinton left the USA with a surplus or did all of you people forget that .  
Jan 15, 2013 9:48PM
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If you'r hurting because of the Social Security contribution hike, thank a Republican. This is the pound of flesh they exacted in return for allowing the income tax rate on people earning more than $500,000 a year to rise a wee bit.
Jan 15, 2013 9:19PM
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Only effects people with payroll paychecks.  Nice cut to take home wages.
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