Consumer confidence lost by payroll tax hike

							Consumer confidence lost by payroll tax hike
Washington Times
January 29, 2013

Sudden return erases gains

It was the tax cut that nobody noticed two years ago.
And it was rarely mentioned in the fight between
Congress and the White House last year over the
expiring Bush-era tax cuts. But this month, the
payroll-tax cut suddenly registered on everybody’s
radar screen — when it went away.
The Jan. 1 expiration of the 2 percentage point cut in
the tax every worker pays to finance Social Security
has prompted a huge drop in consumer confidence,
wiping out all the gains registered in 2012, the
Conference Board reported Tuesday.
Though long expected and not much discussed in
Washington, the sudden tax increase appeared to take
consumers by surprise.
Amid all the publicity about a $650 billion tax deal
between Congress and the White House at the end of
the year, some people apparently were expecting only
“tax hikes on the rich” trumpeted by the media.
But the payroll tax provision — enacted as part of an
economic stimulus deal between President Obama
and Congress in 2011 — hit primarily middle- and
low-income consumers, and for months had been
singled out by economists as the most significant tax
increase under consideration because it would hit
more than 100 million consumers of modest means, not just the well-to-do.
A lack of consumer confidence more >
“The increase in the payroll tax has undoubtedly dampened consumers’ spirits, and it may take awhile
for confidence to rebound and consumers to recover from their initial paycheck shock,” said Lynn
Franco, an economist at the Conference Board.
The board’s confidence index fell to 58.6 in January from 66.7 in December, its lowest level in 14
months. Confidence also slumped less noticeably in November and December as Congress and the
White House engaged in battle over the tax package.
Chris G. Christopher, an economist at IHS Global Insight, called the dive in confidence a “super-bad”
development that does not bode well for the economy.
“This is a major deterioration in confidence,” he said. “It is hard to find a silver lining,” with
confidence about jobs, finances, home-buying and auto purchases all taking hits in the report, he said.
“The new year has not started on a cheerful note. And consumer mood falls faster than it rises.”
The irony is the tax cut was noticed more in its absence than in its presence. Surveys at the time it was
enacted showed that many consumers weren’t even aware of an increase in their take-home pay. But
after two years of spending the extra cash from week to week, consumers clearly were missing the
spare change, which added up to about $1,000 a year for the average taxpayer.
The confidence slump did not cause much concern on Wall Street, where it came as no surprise. An
earlier report on consumer sentiment from the University of Michigan revealed the sharp consumer
reaction to the tax increase. The markets focused on more upbeat news about the economy Tuesday,
including a 10th straight monthly rise in home prices reported by Standard & Poor’s Corp.
But Matthew Shay, president of the National Retail Federation, said the loss of confidence likely
foreshadows another dodgy year for consumer spending. He noted that just the fight over taxes in
Congress, even before the tax hit people’s paychecks, caused a drop in confidence and spoiled what
started out as a strong Christmas selling season at the end of last year.
The holiday season started with a bang, with record levels of sales around Thanksgiving. But the din
from Washington over the budget and taxes in the weeks surrounding Christmas and New Year’s
prompted consumers to withdraw from malls, bringing the shopping season to a weak end, he said.
Spending rose by 3 percent during the holidays — an uninspiring performance, he said.
“The holiday season went head-to-head with Washington’s political wrangling over fiscal concerns,
shifting consumers’ spending plans downward,” Mr. Shay said.
Since the battle over taxes and spending was not resolved at year’s end, with Congress postponing the
deadline for $100 billion in across-the-board spending cuts until March, the same thing could happen
this year, he said.
“What we witnessed during the holiday season is an indication of what we are likely to see in 2013.
Consumers read troubling economic headlines every day and look at their bottom lines at the end of the
month, and they don’t like what they see,” he said.
“Pushing fiscal policy decisions down the road will lead to even greater uncertainty, and will continue
to impact consumers’ desire and ability to spend on discretionary items. The administration and
Congress need to pursue and enact policies that lead to growth and economic expansion, or it could be
another challenging year for retailers and consumers alike.”



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