Restaurants counter payroll tax hike with service boosts

Lost in the headlines that last week’s legislative resolution to the “fiscal cliff” would permanently freeze income tax rates for households earning less than $450,000 is the fact that a two-year-old payroll tax holiday expired, which operators worry could mean less spending at restaurants.

Yet while many restaurants roll out cyclical promotions related to value, operators said the response to the 2-percent increase in the payroll tax in 2013 should not be a price-focused marketing blitz but renewed efforts to inspire loyalty through customer service.

Late on New Year’s Day, President Obama signed into law the American Taxpayer Relief Act, which permanently extended the income tax rates signed into law in 2001 and 2003. However, the bill did not extend the temporary cut of the payroll tax deducted from wage earners’ paychecks to fund Social Security, resulting in that tax rate rising from 4.2 percent to 6.2 percent.

For every $50,000 an American taxpayer earns up to the threshold of $113,700, an additional $1,000 will be withheld for taxes, compared with the past two years.

Consultant Aftan Romanczak, president of Renaissance Consulting LLC in Cumming, Ga., noted that some customer demographics with higher incomes likely would not feel the effects of the payroll tax increase as much, since the taxable wage limit for Social Security taxes is capped at $113,700. “But if you’re in fast food or casual dining,” and thus draw core customers from the demographic of households making less than six-figure incomes per year, “I’d worry,” he added.

“This is going to hit every restaurant in the world,” Romanczak said. “Most of these midsize chains, the Applebee’s of the world, can’t get cheap enough anymore. It’s like trying to turn around a battleship in a pond. By the time they adjust their offers and pricing, people have moved on and changed their habits.”

He said he fears some restaurants will struggle to fend off a “domino effect” in which lower consumer traffic and spending leads to cutting employees’ hours, resulting in a lower quality of service. Above all, restaurants need to maintain or even elevate the guest experience to manage through customers’ post-fiscal-cliff transition period.

“It’s important to keep people loyal to you by taking care of them in times like this, and if you do, you have them for life,” Romanczak said. “But if you’re not sensitive to what they’re going through, it’s easy for them to never come back to you.”