Payroll Tax Hike Still A Problem


Workers were hit with a bit of a shocker when they received their first paychecks this year: a 2-percent reduction in their pay, thanks to the return of the payroll tax to its normal levels. Anybody could have predicted the result on restaurant sales: bad. Traffic and sales fell badly in January and February.

Consumers were also supposed to work their way through this. As the theory went, people would adjust their spending habits to their incomes and, as the weather warmed, so would restaurant traffic and sales.

But a funny thing happened on the way to that recovery: sales and traffic didn't recover as hoped. And, in fact, it appears to be worsening in some ways. Already, companies like Darden Restaurants, Ruby Tuesday and Jamba Juice have reported brutal sales results for the late summer. And various sales trackers have reported weak traffic. According to Black Box Intelligence, traffic in the third quarter fell 1.8 percent.

In searching for a reason for this, prevailing wisdom has centered on a lot of different issue. Among them: that consumers buying things like cars and household appliances have been cutting back on restaurant spending because those expenditures have tightened budgets.

That doesn't appear to be the case, however, at least according to a note this morning from Goldman Sachs analyst Michael Kelter. He suggested, instead, that those tax increases—the ones consumers were supposed to work their way through—have continued to be a drag on spending at restaurants.

Consumers' tax bill has increased $200 billion this year, $125 billion of which comes from the return of the payroll tax to normal levels.

By comparison, spending on durable goods has increased $38 billion. So while that substitution has hurt restaurant spending, that pain is nothing compared with that tax bill.

Thus, according to the Goldman survey, 61 percent of consumers said they noticed the higher tax bill. And 42 percent of consumers said they noticed the higher taxes and have adjusted their spending accordingly, while 19 percent said they noticed the taxes, but it had no impact on their spending. So while most people either didn't notice the tax hike or it didn't have an impact on spending, that 42 percent is still enough to move the needle in the industry.

In addition, consumer optimism fell a bit, according to the survey, but the difference in optimism diverged greatly by income. Those in households of $90,000 or more reported higher optimism. Those with incomes less than $50,000 reported the opposite. And "the spread between the high and the low end reached a new high in our survey."

Wealthier consumers are getting the benefit of things like the stock market and home value increases while lower-income diners are feeling the pain from the payroll tax hike. So restaurants that cater to wealthier consumers will naturally do much better than those that cater to lower-income diners.

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