As we watched the ball drop in Times Square at the end of 2012, payroll processors all over the country were turning up the dial on the payroll tax. This took away 2% of our income in an effort to restore the original tax rate. Many were worried about how much this would perhaps hurt the economy. After all, 2% can add up especially given the relative weakness the US is experiencing. Couple that with continued cutbacks in government spending you have a real reason to expect slow growth in 2013.

There are still things to be excited about in 2013. Housing is in recovery and people continue to refinance their homes in many cases reducing their payments. Businesses continue to hire even if the rate is slow. And state and local governments may pick up their spending too. Taken all together, this looks like a recipe for a mediocre year where you’d hope that something will pick up the slack from reduced government spending and the increased taxes.

It’s still a little too soon to tell if there has been an impact or not. For one thing in December consumers spent considerably less than they could have as reflected in the personal savings rate below.

personal savings rate 2012

Most everyone with a disposable income was aware that their tax rates were going up. To prepare for that they saved a little more. In 2013 we would want to keep an eye on this number to see how customers react. Do they maintain the savings and cut spending or dip into the savings to make up for the reduced income? We’ll see the results for January at the end of this month.

gas prices february 2013

Unfortunately a new wrinkle has been thrown into the mix. Gasoline prices are once again shooting up and there are few explanations. There have been some supply issues at certain refineries but the best guess is the old chestnut of speculators. High gas prices eat into our disposable income and force consumers to either drive less or spend more on fuel. The combination of rising fuel costs and the increased taxes seems to be impacting some of the nation’s largest retailers.

In perhaps the most troublesome data nugget so far, retailers like Walmart are finding their 2013 sales to be weak. Internal emails from Walmart point to February sales alone being “a total disaster”. Executives seem to be blaming the tax increase for their reduced sales. But that seems counterintuitive. If people have less money to spend they’re probably more price sensitive. They would look to places like Walmart to save money, perhaps passing on department stores and other non big box retailers.

Why is Walmart struggling then? That’s the first question to emerge as a result of this tax increase. Has Walmart just dropped the ball and is doing a terrible job driving sales? Or have the lower income folks for now simply run out of any extra money to spend?

We’ll find out more about the impacts of this tax over the next few months.

categories: business, economics, government, personal finance