Monday, December 19, 2011

Payroll Taxes and the After-Christmas Sales

A temporary payroll tax cut looks likely to die in the House of Representatives today, with the House Republican caucus drawing a line in the sand. With it, extended unemployment benefits will also expire. As these measures expire December 31, both the temporary payroll tax cut and unemployment compensation eligibility end. The unemployment compensation will surely be taken up again when the next session of Congress convenes in January, though probably in a reduced form.

For the payroll tax cut, though, there probably isn’t any politically feasible way forward. The Senate, which passed the extension by a vote of 89–10 only to be blindsided by the House, is unlikely to try the same thing again. The expiration of the tax cut will have the economic effect of a 2 percent pay cut for workers, which may translate into about a 5 percent decline at retail, along with a drastic decline in saving. The expiration of unemployment benefits, even if they are revived after a few weeks, will also have a chilling effect on household spending.

This is an immediate worry for retailers, which found themselves overextended for the holiday season even before a dismal last weekend before Christmas. With consumers facing a take-home pay cut and the loss of unemployment benefits, after-Christmas sales may be sparsely attended, leaving retailers with merchandise they can’t sell.