Originally enacted in December 2010 to help taxpayers weather the recession and to spur economic activity, the payroll tax cut expired Jan. 1 of this year. The restoration of the tax effectively raised the rate from 4.2 percent in 2012 to 6.2 percent in 2013, shaving 2 percent from consumers’ take-home pay.
That means Americans making $50,000 a year will pay $83 more in taxes each month, almost $1,000 more each year. Those making $75,000 will pay $125 more each month, or $1,500 more each year. As retailers see it, that’s $1,500 less a consumer has to spend on groceries, household goods, and dining out.
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.”