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Payroll Tax Increase Weighs on Consumer Spending

Ryan McVay/Thoinkstock(NEW YORK) -- Does it seem like your paycheck has gotten smaller?  It has: 2 percent smaller, in fact, than it was in 2011 and 2012.

Back then, employees only kicked in 4.2 percent of their wages towards Social Security thanks to a temporary rate cut as part of a plan to stimulate the economy.  But as of Jan. 1, 2013, the payroll tax, which funds Social Security, among other things, jumped back up to 6.2 percent, where it had been before.  That translates to about $700 per average worker annually, reports the Tax Policy Center, a non-partisan research center.

Many economists and retailers have worried that the increase will affect consumer spending -- and so far, at least two stores have noticed a decline in sales.

Walmart, the world’s largest retailer and the biggest private U.S. employer, had the worst start to a month in seven years, based on internal company emails obtained by Bloomberg News.

In a Feb. 12 email, Jerry Murray, Walmart’s vice president of finance and logistics, said that the February month-to-date sales were a “total disaster.”

In another internal email, Cameron Geiger, senior vice president of Walmart U.S. Replenishment, asked, “Where are all the customers?  And where’s their money?

A month earlier, on a Jan. 3 conference call, Family Dollar Stores Inc. CEO Howard Levine noted that higher payroll taxes “go against our customers’ wallet.  Clearly, they do not have as much for discretionary purchases than they did.”

A report from the National Retail Federation, a retail trade association, found that January retail sales (excluding cars, gas and restaurants) increased 0.3 percent seasonally adjusted from December.  These retail sales figures indicate a “stable yet fragile economy,” NRF President and CEO Matthew Shay said in a statement.

January retail sales, released on Feb. 13 by the U.S. Department of Commerce, showed total retail and food services sales (including cars, gas and restaurants) increased 0.1 percent seasonally adjusted.

But Jim O’Sullivan, chief U.S. economist with High Frequency Economics, in Valhalla, N.Y., told ABC News that the payroll tax is a “hit to growth, but not a devastating blow.”

“Certainly a lot of people live paycheck to paycheck, but a lot of people don’t,” he said.  “With some people it won’t affect their spending, it will just affect their savings rate.  It varies from person to person.”

Robert Johnson, director of economic analysis at Morningstar, a Chicago-based investment research firm, believes the payroll tax has caused “a little slowing, but nothing very dramatic.”

He argues that any economic downshift is not just because of the increased payroll tax, but also because tax refunds have not gone out yet.

“To the high-end guy that doesn’t make a difference, but to someone counting on an income tax refund that’s another matter,” he says.

He also cites high gas prices as another factor affecting Walmart’s sales.

“People tend to drive long distances to get to Walmart, and so when gas prices go up, people say, ‘I’ll go to local store but I’m not making a special trip because it will cost me money with higher gas prices,'” Johnson says.

Copyright 2013 ABC News Radio

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