How Much Will The Payroll Tax Hurt Restaurants?


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The vast majority of workers are starting to get lighter paychecks this month, thanks to the end of the 2-percent payroll tax holiday agreed to in the January 1 budget deal between Congress and the president. Invariably, some of this money might have gone to restaurants. The big question is how much.

The return of the payroll tax to 6.2 percent of earnings will have a $125 billion hit on the nation’s paychecks. That will likely come out of discretionary spending, and lower discretionary spending yields lower restaurant sales.

“When you get that paycheck and see 2-percent higher taxes, you’re going to reduce discretionary spending,” said Bob Derrington, analyst at Northcoast Research. “Restaurant companies are going to feel that.” Another analyst said it would be a “shock to the system.”

Some people believe that the impact would be felt early, as people first see their smaller paychecks, but will ease as the year goes on and people readjust their spending. Still, there is some disagreement as to what restaurant sectors would get hurt the most.

Raymond James analyst Bryan Elliott told us recently that he thought the payroll tax increase would take sales away from QSR, which has a higher share of lower-income customers who feel the effect of the loss of $1,000 in discretionary income over the course of a year. Then again, QSRs are often convenience-oriented decisions while casual dining is more discretionary. That said, “It’s not likely to be helpful to anybody,” said Barclays analyst Jeff Bernstein.

Restaurants themselves seem uncertain. Speaking at the ICR XChange conference last week, Cracker Barrel CFO Larry Hyatt acknowledged that his chain’s customers are the type who would be sensitive to a loss of 2 percent of their income. Yet, he noted, higher gas prices can have as much of an impact on disposable income as the payroll tax. In short: the company doesn’t know yet how much of an impact it would have, and probably won’t.

Scott Colosi, president of Texas Roadhouse, didn’t know its impact either. But, he said, “It’s scary. If someone has $1,000 less in his pocket over the course of the year, they’re going to spend less on food.”

 

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