California Apparel News

Despite a few positive indications, new state, federal and sales taxes will dip into household budgets in 2013, slowing the rate of economic growth, financial experts said.

“There are going to be a lot of head winds this year,” said Esmael Adibi, director of the A. Gary Anderson Center for Economic Research atChapman University in Orange, Calif. “So growth is going to be rather tepid.”

On Jan. 1, Congress voted to keep income taxes at the same rate they were in 2012 for those earning less than $400,000 a year. But they allowed an increase in the Social Security payroll tax, which had been reduced in 2010 to help stimulate the economy.

In 2010, the Social Security tax went from 6.2 percent to 4.2 percent. That was a significant savings for many, who ended up with a little more cash in their pocket to spend on clothes, electronics and dining out. For example, a person earning $50,000 a year was paying $1,000 less in taxes.

The bump up in the Social Security payroll tax will have a significant effect on the economy. Mark Zandi, chief economist at Moody's Analytics, calculates that the higher Social Security payroll tax will reduce economic growth this year by 0.6 percent.

The back-and-forth negotiations between House Republicans and the Obama administration over income-tax rates resulted in high-wage earners having to pay more to the federal government.

For individuals who make more than $400,000 a year or for a household earning more than $450,000, federal taxes jump this year from 35 percent of their salary to 39.5 percent. For someone making $400,000 a year, that means an extra $18,000 in taxes.

One more blow to the pocketbook is the spike in the capital-gains tax. For capital gains—dividends of more than $400,000 for individuals and $450,000 for households—the tax inches up from 15 percent to 20 percent.

Californians face an additional tax. Proposition 30, approved by 55 percent of the voters last November, will boost the state sales tax from 7.25 percent to 7.5 percent for four years and heighten taxes on the wealthy for seven years. It will be used to invest in the state’s schools and public safety. Anyone making more than $250,000 will see their tax rate move from 9.3 percent to 10.3 percent of their income. Those who earn more than $1 million will be paying 13.3 percent of their income to the state as opposed to 10.3 percent. This new state tax is retroactive to earnings from 2012.

“All these items are going to directly impact spending, and we know spending is a big component [70 percent] of our gross domestic product. So growth is going to be tepid in 2013,” said Chapman University’s Adibi.

Experts at the University of California, Los Angeles agree that the economy will be moving slowly. The UCLA Anderson Forecast sees a less than 2 percent uptick in the national gross domestic product for the first half of this year, then a slow drumroll for a more robust 2014.

“We are looking at a fairly weak 2013 in general,” said Jerry Nickelsburg, senior economist with the UCLA Anderson Forecast. “Then we will be back to normal growth in 2014.”

On a positive note, Nickelsburg noted that China’s exports to the United States are rising, which means local warehouses, trucking companies and railroads will be busy this year moving goods from the ports of Los Angeles and Long Beach to store shelves.

Personal incomes in California should grow 1.8 percent this year and then 3.1 percent in 2014. Unemployment will hover around 9.7 percent this year and then dip to 8.4 percent next year.

Retail scene

On the retail front, business should show some improvement. “We do expect a little bit of improvement in 2013 from 2012, but it is not going to be significant,” said Nikoleta Pantiva, senior retail analyst with IBIS World, a research company in Santa Monica, Calif. “Looking at the apparel sector, we are expecting revenues to be up 2.3 percent in 2013. We do have higher taxes across the board, and that is one thing that contributes to consumers holding more tightly to their money. Disposable incomes are going to be more strained.”

High-end luxury stores could take a hit now that the wealthy will be paying more income taxes. That was seen when Tiffany & Co. reported that net income plummeted 30 percent in the third quarter of 2012. The company cited a higher-than-expected tax rate, economic weakness, and high precious metal and diamond costs for its financial turmoil. Other high-end retailers are seeing modest improvements in sales, but they aren’t popping any champagne corks yet. During the nine months ending Oct. 31, Saks Fifth Avenue posted a modest 3.9 percent gain in total sales, to $2.1 billion, compared with 2011.

Mass merchandisers, such as Costco and Walmart, have done well over the past five years and are expected to see revenues jump 5 percent in 2013 over 2012, Pantiva predicted. But stores should see more competition from e-commerce sites, according to ChainLinks Retail Advisors, a retail real-estate advisory service in Atlanta. The group believes e-commerce will continue to shape the future of shopping malls. More people shopping online means fewer clothing stores in the mall. Shopping centers will be searching for more restaurants and entertainment outlets to fill their vacancies. ChainLinks Retail Advisors also sees more store expansion in urban areas where more affluent consumers live. Retailers are banking on sure hits instead of making risky investments.