How is being 2 percent lighter in the wallet affecting you?

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Posted: Sunday, January 27, 2013 12:00 am

If money fell out of your wallet, you would realize it was missing. But what if it dropped out of your paycheck?

“I honestly have been working so much, I didn't realize,” said Cody Turner, manager at Best Buy at Oak View Mall.

Turner, 22, and several other metro-area workers said they didn't notice that the federal government started taking a bigger bite out of their paychecks this month. Other workers did notice and said they plan to cut back on dining out, driving to work and retirement savings to make up for the loss.

A temporary two-year reduction in Social Security payroll taxes, intended as an economic stimulus, ended and the tax rate went back to 6.2 percent from 4.2 percent Jan. 1. For the typical Nebraska household making about $50,000, that's a difference of about $38 every two weeks, or about $1,000 a year — think of it as the equivalent of an extra mortgage payment.

Asked about the tax, Turner got online and looked up his latest paycheck.

“It's about $8 difference,” he said — to him, one less dinner at McDonald's.

His Best Buy co-worker, Brett Masterson, 25, also hadn't noticed the income cut in his Best Buy paycheck or in his earnings from an Omaha call center. “I didn't know that,” he said.

Maybe it's because it's just 2 percent, or because most people get paid electronically and don't see an actual check, or because many Nebraskans — like Masterson — work more than one job or have fluctuating hours.

“So many of our guys have paychecks that vary week to week,” because of overtime, said Kim Quick, president of Teamsters Local Union 554 in Omaha. Quick said he had heard no talk or complaints from workers about the cut.

But 2 percent adds up: The two-year reduction meant about a $215 billion reduction in national payroll tax revenues, according to the Social Security Administration. Now that money won't be available to wage earners for saving, spending or investing.

A recent Federal Reserve Bank of New York report found that people surveyed during the tax holiday said on average they spent 36 percent of the extra money in their paycheck, saved 24 percent and used the other 40 percent to pay down debt. High-income workers spent the largest share of the tax cut funds, while low-income workers were more likely to pay down debt.

Asked what they planned to do if the tax cut were not extended, survey respondents said they would reduce consumption by 71 percent of the amount of the tax cut, or about $710 a year for the typical household.

Creighton University economist Ernie Goss said retail sales make up about 70 percent of the state's economy.

“This is going to dig into that,” he said.

There is evidence it already is. Electronic payment processor First Data, with operations in Omaha, said consumers' knowledge that the cut would expire, combined with concern about other changes to tax rates, likely contributed to soft December spending results. Dollar volume growth was 4 percent in December, the lowest in three years, the firm said, and retail dollar volume growth was at a 12-month low at 2.9 percent.

It's hard to pinpoint where households will make their spending cuts. The effect may spread out so that an individual retailer doesn't see much change.

Andrea Foley, owner of Baby Junk baby supply shop at Rockbrook Village, hasn't heard any customer conversation about the tax or noticed it in her own paycheck.

James Mason, an employee at Lisa's Radial Cafe, a diner near St. Cecilia's Cathedral, said he hadn't heard about the tax increase but said people do cut back on eating out when their resources are stretched.

“Since the recession, the amount of volume we've had has decreased, and with that the tips to our waitresses have decreased,” he said.

Cutting back on a few cups of coffee a week would make up for the difference in taxes, but at Crane Coffee, general manager Rachel Ayala-Johnson said she hasn't heard customers talking about the tax and sales have been strong. She said there was far more concern when the City of Omaha added a 2.5 percent restaurant tax in 2010.

Coffee loyalists would rather skip lunch than a latte, Ayala-Johnson said: “Coffee may be one of the small luxuries” that people treat themselves to.

She said some of her employees mentioned the change and were concerned about it, but they tended to be those in managerial positions rather than younger, part-time workers.

Starbucks last week reported strong first-quarter results for the period ending Dec. 30, with record revenue and a 7 percent increase in U.S. same-store sales, but Reuters reported that the chain's executives and their industry peers were cautious going into the new year, largely because of concerns that the payroll tax increase will depress consumer spending.

It's too early to tell whether the tax increase that is reducing take-home pay will have an impact on the company's business, Chief Financial Officer Troy Alstead told Reuters.

McDonald's warned that its January same-restaurant sales would fall.

Rikard Bandebo, First Data vice president and economist, said the fact that more taxes are now being withheld from paychecks will put negative pressure on consumer spending in the near term, and that spending growth will be lower on average than it was for most of 2012. However, he said, the improving housing market and unemployment rate should result in consumer spending picking up later in the year.

University of Nebraska at Omaha economist Ken Kriz agreed that the effects would not linger. Kriz expects sales taxes collected by the State of Nebraska to be about $20 million less than they would otherwise be, but he predicted sales tax receipts still would rise year-over-year.

After this year, he said, “The effects will start to wear off. Things will start returning to their original trend line.”

Some workers already have considered how the tax increase will affect their budgeting.

Patrick Falke, finance manager for Project Harmony Child Protection Center in Omaha, said he had been able to use the payroll tax holiday to add to his savings. He said the 2 percentage point difference in his income won't mean less spending now, but it will mean less left over to save.

Falke, 29, handles payroll in his office so he knew the change was coming and informed his co-workers about it. He said he hasn't heard any complaints, either at work or among the members of the Greater Omaha Young Professionals, where he is board chairman.

He said young professionals, entering the workforce around the time of the Great Recession in an uncertain hiring environment, are accustomed to being cautious about spending and are conscious about putting money aside.

He and his wife, a nurse practitioner, didn't sign up for cable when they bought a house, for example.

“We know a lot of people who bike to work or have evaluated how they do things to save money,” Falke said.

One of those is Phil Jarrett, 26, who works in marketing for the Boys & Girls Clubs of the Midlands.

The increase in taxes, he said, will mean less spending on dining out and riding his bike to work more often to save on gas money.

“Certainly that is money I'd like to hang on to,” Jarrett said, “but at the same time I consider Social Security an investment. It's something that we've promised other people, and it's something we've been promised. I treat it the same way I would treat paying into a 401(k). We're not going to have that unless we put money into it.”

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