Why is Wal-Mart worried? Payroll tax could cut consumer spending. (+video)
Multiply that by 153.6 million people in the labor force and retailers start to panic. According to an estimate by Citigroup, the expiration of the payroll tax cut will move $110 billion out of consumers’ pockets.
For high-end consumers, the payroll tax may not change a thing, and for many middle-income consumers, it will likely result in only a subtle shift. But the impact is most likely to be felt among low-income consumers and the businesses they tend to frequent, like Wal-Mart.
“It’s a big deal,” says Morgan Housley, a macroeconomic analyst with Motley Fool, an online financial education website. “The biggest impact is on lower-income households since the payroll tax is regressive, only applying to the first $113,000 of income. Wealthier households don't feel the same pinch because the tax doesn't hit all of their income. Lower-income households also spend a larger share of their income than wealthier consumers.… Low-income families are in one of the toughest spots they’ve been in since 2009.”
Combine that with stagnant employment and wages, as well as soaring gas prices – gas is up 50 cents a gallon in the past month alone – and consumers start to feel the pinch, says Edgar Dworsky, founder of ConsumerWorld.org, a consumer information service.
“Those who are living paycheck-to-paycheck, spending all they’ve got, those are the folks who are going to be hit the most,” Mr. Dworsky says.
Retailers are also bracing for the hit, says Mr. Housel.
“The big retailers like Wal-Mart are very good at reading customers' shopping habits and adjusting quickly,” he says. “You'll see stores adjusting inventory toward lower-price items and smaller-packaged goods.”
Case in point: McDonald’s is promoting its Dollar Menu, Burger King slashed its Whopper Jr. burger from $2 to $1.29, Tyson Foods is ordering more budget-friendly chicken and lower-priced cuts of meat, and Wal-Mart is stocking shelves with cheaper goods and smaller packages of bulk items, reports The Wall Street Journal.
