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Why Walmart Will Be Hurt By the Fiscal Cliff

Which large company will be the biggest loser from the fiscal cliff? Daniel Gross nominates Walmart.

Trying to invest based on fiscal-cliff outcomes is something of a fool’s game. On the one hand, the stock market doesn’t care about the debate in Washington. It may be difficult for political junkies to believe it, but there are dozens of factors more influential on the short-term movement of asset prices than John Boehner’s latest jejune press conference. The long-term performance of stocks has much more to do with massive global trends than with short-term actions in Washington.

But of course some stocks are moving in anticipation of changes in policy. Even if they’re saved from the sequester, defense contractors will likely feel some pain in the coming years. An increase in the dividend tax rate is likely to sap the value of stocks whose main appeal is the dividends they throw off. As Matthew Zeitlin noted, investors in utility stocks seems to have taken that into consideration.

There is one really large company that is likely to suffer from the fiscal cliff, regardless of the resolution: Walmart. Walmart is the largest retailer in the U.S. And since it serves a lower- to lower-middle-income customer, it is a pretty good proxy for what is happening in the bottom, say, 40 percent of the U.S. economy. Despite international expansion in recent years into South Africa and elsewhere, Walmart is still something of a homebody among giant companies. In its most recent quarter, international sales of Walmart accounted for less than 30 percent of total revenues.

Earlier this week, CEO Mike Duke, who has visited the White House to talk about the fiscal cliff, spoke at the Council on Foreign Relations about the challenge the company is facing. As Allan Dodds Frank reported, Duke said company polling showed its customers were paying more attention to the shenanigans in Washington. And the uncertainty is harming confidence and Christmas sales. “These same customers, 15 percent of our customers, are telling us this discussion about ‘fiscal cliff’ will affect what they spend on Christmas.”

But a resolution of the fiscal cliff hostage situation isn’t likely to help Walmart, or its shoppers all that much. Thus far, most of the debate about the cliff has centered on how policy changes will affect the rich. How much will taxes on income, capital gains, dividends, and estates rise? Will the wealthy lose deductions for charitable giving and the home-mortgage deduction. Regardless of the outcome, the one percent are going to take a hit.

For people on the lower end of the income scale, who don’t pay much in taxes and don’t itemize their deductions, there is likely to be less of a sea change in immediate behavior from any changes. But two overlooked components of the fiscal-cliff situation will hit those on the lower rungs of the income ladder directly and instantly starting January 1.

First, workers are likely to face a sharply higher payroll tax. In 2011 and 2012, President Obama and the Republicans agreed to temporarily reduce the payroll tax—the regressive tax levied on the first $110,100 of income that funds Social Security and Medicare—from 6.2 percent to 4.2 percent. For a person making $50,000, that cut meant an extra $1,000 in income, or about $40 for every bi-weekly paycheck.

It may not be much for a Wall Streeter. But for people who live on their wages, who spend what they make immediately, and who don’t have investment or capital-gains income, the payroll tax cut is quite meaningful. Since the onset of the recession in 2008, Walmart has noted a “paycheck cycle”—sales spike when people get paid and then dwindle through the two-week pay period. That dynamic has continued through 2012. As CEO Duke noted earlier this week: “The customers are still working to get by month to month, paycheck to paycheck.”

A month ago, I suggested the payroll tax could be the fiscal cliff’s first victim. Sure, President Obama’s opening offer to Republicans called for a payroll tax extension. But Republicans never liked it much in the first place. Starting January 1, it’s likely that the typical worker’s paycheck will be $20, or $30, or $50 less thanks to a higher payoll tax. That will reduce the buying power of lower-end consumers. Strike one against Walmart.

There’s a similar dynamic at work with government benefits. Many state and federal programs that support income are essentially quasi-direct stimulus for Walmart. Cash goes to the beneficiary, and then almost immediately into Walmart’s coffers. The company has noticed a trend in which people line up to shop at Walmart right when their food-stamp benefits load. In recent years, unemployment benefits have been a significant component of income for the unemployed. And these days, the unemployed are disproportionately concentrated in the shallow end of the income pool. Remember, the unemployment rate for college graduates is 4.2 percent, while the unemployment rate for those with only a high-school education is 8.4 percent.

Here again, the fiscal cliff contains bad news. In normal times, federal unemployment benefits are paid for 26 weeks. For the last several years, however, the government has offered additional support. The Emergency Unemployment Compensation programs offers people in high-unemployment states up to 47 additional weeks of benefits. These extended benefits are a form of stimulus for companies who cater to lower-end consumers. The most recent data shows that there are now 2.19 million people receiving extended benefits, compared with 3.05 million a year ago. But they are slated to expire on January 1. The Congressional Budget Office reports that extending the emergency benefits for another year could cost $30 billion. Put another way, the termination of these benefits will sap $30 billion from the buying power of lower-income American consumers. Strike two against Walmart.

Obama has proposed extending the uemployment benefits and extending the payroll tax cut. But, here, the Republicans are in the same situation that the Democrats are in with the Bush-era tax rates. They never liked these expensive items in the first place. If they simply do nothing and refuse to engage, these two items that the Democrats really want simply go away. And so if there is a grand bargain, it is likely that these two items will either fade away or be sharply scaled back. The price Republicans extract for agreeing to stick it to the rich may be getting Democrats to stick it to the poor.

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So, yes, concern about the fiscal cliff may be harming Christmas sales at Walmart. But the resolution of the fiscal-cliff hostage situation is likely to harm its sales next year. Investors are catching on. Check out this one-month chart of Walmart compared with higher-end rival Costco, and with the Standard & Poor’s 500. Since the fiscal-cliff hostage crisis began, Walmart’s stock is down more than three percent, while Costco’s is up about 3.6 percent and the Standard & Poor’s 500 is up 4.7 percent.