A Not So Invisible Tax Increase

In an extremely busy lame duck session, the Congress passed legislation in December to extend the current income tax rates for another two years, thus sidestepping an increase for most all tax payers.  One primary reason for the legislative compromise was the perceived need to preserve spending power for individuals in what is still a weak economy.

So, along comes a “tax increase” on an item indispensable to our modern society, and by that we mean the recent run-up in the price of oil and in turn the price of gasoline at the pump.  As oil prices have moved over $90 per barrel and gas prices over $3 per gallon, what used to be a $30 dollar expense is now above $40 and climbing.  As reported by AAA, gas prices are up 4 percent in the last month and up 16 percent from December, 2009.

Why call this a “tax?”  Most everyone needs gasoline – it is not an optional expense.  To take a personal note:  we have a Toyota van and a Honda Accord.  On Christmas Eve, both autos needed gas.  It cost our family a total of $94 to fill the tanks in anticipation of Christmas travel.  That amount was money we could not spend to eat out, to buy additional gifts or to save for our IRAs.  It was lost to us.  Now some of it undoubtedly gets recycled back into our economy and helps domestically – the gas attendant, the tanker driver and possibly the refining workers.  However, with our country’s need to import 66 percent of our oil (2007 report by the Department of Energy) a good portion of that $94 left the country.

Further, the tax hits those who can least afford it.  A recent headline screamed that it may cost up to $300 per month for gasoline this winter.  Just for sake of argument, let’s assume that the number is correct.  If a family earns the median income (2009 Census Bureau) of $50,000, that $300 per month or $3,600 per year equals 7.2 percent of gross income.  If the family earns $100,000, the cost falls as a percentage to 3.6 percent, but would skyrocket to 10 percent for a $36,000 income.  Note these amounts have not been adjusted to show the cost versus take-home pay.

A problem is that there is little in the short-term that can be done.  The current increase in oil prices appears to be due to increased economic activity worldwide, unlike the sharp increases in 2008 which had components of speculation and currency fluctuations to them.  The demand from growing economies such as China and India pushes up prices that all countries have to pay.  We cannot avoid that – even domestically produced oil is priced off the international markets.  Ironically, better overseas growth increases our energy costs and in turn weakens domestic purchasing and domestic growth.

A further irony is that we cannot say if this is a short or long-term problem.  Remember 2008?  Oil prices started the year at about $100 per barrel, peaked at $147 in early July and ended the year at $45.  With that recent backdrop of volatility, it is hard to argue for a major short-term fix to something that may not even be a problem by summer.  Aside from developing a clear U.S. energy policy, the governmental solutions may not be available or even desirable.

About the author

Roger Southward, CFP®

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