NEW YORK (MainStreet)—Ian Aronovich, who runs a government auctions website in Great Neck, NY, has tightened his household budget in response to the increased payroll taxes, which has had working Americans taking home on average $130 less per month as of January 1.
“Once the payroll tax was announced, we called up our cable company and negotiated a discounted rate for phone and TV, as if we were first time customers,” Aronovich said. Plus, his wife and he canceled their phone service and ported the number to Ooma Telo, which costs just over $3 monthly.
He’s not alone. Many Americans, in fact, are cutting back on their social life, with 20% forced to cut back on going out to bars and restaurants and 19% putting a limit on eating lunch out, according to a recent Accounting Prinicpals 2013 Worknomix Survey.
As people start to notice the less robust figures in their bank account, they may begin to have a sense of paranoia.
“People are saying, ‘This is going to have an impact, I’m going to get my expenses under control,’” said Mike McNamera, a vice president at Accounting Principals.
The payroll tax cut was estimated to drop GDP by 0.8%, or $125 billion. As long as GDP comes in higher than this expected drop then the U.S. would not fall into negative growth and avoid a recession. But though the effects may not have national implications, this is dinging people in the pocketbook at a personal level.
Ted Bovard, managing director and principal at Fort Pitt Capital Group in Pittsburgh, Penn., said this was the tax change that snuck up on people.
“The thing that threw people off is that with all the other tax increases and changes, everyone forgot about the payroll tax,” he said.
People were focused, he said, on the tax bracket jumps for people making over $400,000 and marrieds over $450,000, but if you’re making $40,000 to 50,000, you just dropped a couple thousand bucks.
“And if you’re living pretty close to the edge, this is going to affect you,” Bovard said. "I’m sorry, but I think that’s a lot of money.”
Non-inflation adjusted retail sales numbers from the Census Bureau showed that restaurant sales were down 0.6% in January and 0.7% February compared to the prior month, making the category one of the biggest decliners in the report.
This is also hurting pension funds: over a quarter (28%) of the American workforce has prematurely pulled from 401(K)s to pay for unexpected healthcare costs (25 %), home or car repair (27 %) and periods of unemployment (22%).
Money has to come from somewhere to pay the bills, and buying groceries and eating leftovers at home may not cut it.
“People are saying, ‘If I can’t make it through today--then twenty years from now? I just can’t look at that. I’ve got to look at today,’” said McNamera.
Not All Doom and Gloom
Still, nearly one quarter (22 %) of working Americans have not cut back on their spending at all.
“Taxes are only part of the mix when consumers decide how much and where to spend,” said Robert Johnson, an economic analyst at Morning Star. “Employment is up, hourly wages are up and the number of hours worked are all up, more than offsetting the payroll tax increase.” To boot, consumer assets, both homes and the stock market up, so consumers may have confidence to go and spend money.
In addition to these economic indicators that give people increased confidence, Doug Lockwood, CFP, Branch President at Hefty Wealth Partners in Auburn, Ind., says this budget conscious behavior doesn’t typically last—equating it with fad calorie-cutting regimes.
“They may feel it for a month or a quarter, you go on the diet,” he said. “It works for 90 days, and then you’re back to the bad habit.”
Interestingly, payroll taxes were lowered for 2012 by 2% but the current uptick is on par with 2011 numbers.
“But people got used to a method of living by having that extra money,” McNamera said.
There may inevitably be unforeseen consequences of this payroll tax switch.
“It’s only March,” McNamera said. “As this money continues not to come in, how is it going to affect the restaurants, the places selling lunches to these people? How is it going to affect Starbucks? Am I going to go in and pay $4 for a coffee?”
Yet for Ian Aronovich in Great Neck, NY, there’s hope for not cutting the niceties in his routine. As he’s made minor cuts to his lifestyle in terms of electronics, he is not anticipating any more major budgeting.
“Because we made some cuts,we don't really feel a need to change our lifestyle and we certainly won't be cutting down on Starbucks, dining out or vacations,” he said.