January 12, 2015
Firstly, this week we give our view on the increasing efforts to use lower gas prices as a rationale for higher gas taxes, and, secondly, highlight the States that are most exposed to the weakness in international economies.
Should Lower Gas Prices Lead to Higher Gas Taxes?
It has been a while since I (Gregg) have offered words in our weekly. However, the subject of raising the gasoline tax has struck a nerve so, here goes.
As a result of falling oil prices, there are many elected officials chomping at the bit to raise the gas tax. Essentially they are moving to take advantage of what they hope will be green grass for years to come. This seems to me like, with housing prices having recovered to an extent (location matters), the Federal government wanting to lower the mortgage insurance premium for those putting down the bare minimum on a new home purchase with Fannie or Freddie buying those mortgages. My, do we have short memories. It was only a few years ago that we (the taxpayer) were bailing out Fannie and Freddie. And now, in January 2015, here we are seriously considering raising the gas tax when, only six months ago oil was about $100 per barrel. In short, both positions seem shortsighted with little understanding of real impact or history.
Driving to work last Friday, after filing my car with regular gas for $2.59/ gallon, I heard that many States and the Federal government are thinking of raising the gasoline tax given the steep decline in prices. While not a fan of increasing taxes, I thought this might be warranted to offset declining tax receipts resulting from lower gasoline prices. I had assumed the gas tax was, like most other taxes, a percentage of the price per gallon. However, after some quick research, I learned that the gas tax is more akin to an excise tax (in some circles, referred to as a regressive tax that disproportionately impacts those with less) and both the States and the Federal government get a piece of the pie. According to the American Petroleum Institute, the volume-weighted State average is 30.08 cents per gallon and the Federal government charge is 18.40 cents per gallon.
U.S. Gasoline Motor Fuel Taxes by Region
(Cents per gallon)
Source: American Petroleum Institute, DIVER Data Solutions
Because the tax is levied per gallon, lower gas prices will not lead to lower gas tax revenues. One can even argue that lower gas prices may lead to greater consumption, thereby increasing revenues. So, why talk of a tax increase if the change in the price of oil (as reflected at the gas pump) has no negative impact on tax revenue for States or the Feds?
Most advocates of a gas tax increase cite the need for spending on roads and highways and the potential to add construction jobs. Perhaps. While few doubt that bridges and other infrastructure need work, what solution would have been proposed if oil prices had not declined so precipitously? How much of the perceived need for new roads is based on faulty projections of future auto travel?
Source: U.S. PIRG, Frontier Group
If the goal is job creation, we should ask if there is a glut of construction workers counted as unemployed (or any that have left the labor force and are not counted as part of the employment recovery).
BLS data does not suggest so (see DIVER Data Access, Filter or DIVER Data Solutions). BLS data shows that 43 States and over 1,760 counties have a greater percentage of their employed population in the construction industry than one year ago.
Only 7 States (plus PR and VI) have shown declines in the construction share of employment.
Construction Share of State Employment
Source: BLS, DIVER Data Access-Filter Module
Does the violent change in gas prices spell a true correction or is it an overreaction, which will whipsaw back in time? If so, will the tax increase be reversed? Doubtful. Also worth considering is if the increase in the gas tax at the pump would offset some of that new found extra coin the consumer has for spending thereby impacting sales tax receipts on other purchases (which are used for far different and diverse purposes).
If members of Congress and others believe the consumer has more money available to pay more taxes, is this the best use of “new” tax revenue or is this simply an easy way to pass off a tax increase because our elected officials think we won’t notice as we bask in the glow of cheap gas? Come on. First, we were told that the drop at the pump was like an income increase (makes us feel better when wages have been stuck for some time), which was spurring consumer spending, and now they want to further tax our “raise.”
When contemplating the pros and cons of a possible gas tax increase, one should also contemplate the impact of the same on State tax receipts and consumer spending. Not only today, when the price of oil is under $50 per barrel and the cost to fill our tank is low, but also when prices increase either with inflation or more violently due to increased global demand or other factors.
Fed Cites Risks to US from International Weakness
“Many participants regarded the international situation as an important source of downside risks to domestic real activity and employment”
Minutes of the Federal Open Market Committee (December 16-17, 2014)
The minutes from the December Fed meeting highlighted concern that weakness in economies abroad could bleed into the United States. A decline in demand for US exports would be one potential transmission mechanism for this weakness.
With that in mind, we used DIVER Data Access, Filter to identify which States are most exposed to a decline in exports.
Exports as % of State GDP
Source: U.S. Census, BLS, DIVER Data Access-Filter Module
There are 14 States that get more than 15% of their GDP from exports.
Users of DIVER Analytics can drill down to view more details of a State’s export picture, including trading partners (we provide Michigan as an example).
Michigan’s Top Countries for Exports
Source: U.S. Census, DIVER Data Access-Search Module
With China, Germany and Japan among its top trading partners, it is clear that Michigan’s economic health is at risk if we see the international spillovers that worry the Fed.
This week the Lumesis team will be in Philadelphia and Washington D.C.
Have a great week,
Gregg L. Bienstock Esq. & Michael Craft, CFA
CLICK HERE to Subscribe to the Weekly Commentary
Should Lower Gas Prices Lead to Higher Gas Taxes? States with Large Export Exposures
January 12, 2015
Firstly, this week we give our view on the increasing efforts to use lower gas prices as a rationale for higher gas taxes, and, secondly, highlight the States that are most exposed to the weakness in international economies.
Should Lower Gas Prices Lead to Higher Gas Taxes?
It has been a while since I (Gregg) have offered words in our weekly. However, the subject of raising the gasoline tax has struck a nerve so, here goes.
As a result of falling oil prices, there are many elected officials chomping at the bit to raise the gas tax. Essentially they are moving to take advantage of what they hope will be green grass for years to come. This seems to me like, with housing prices having recovered to an extent (location matters), the Federal government wanting to lower the mortgage insurance premium for those putting down the bare minimum on a new home purchase with Fannie or Freddie buying those mortgages. My, do we have short memories. It was only a few years ago that we (the taxpayer) were bailing out Fannie and Freddie. And now, in January 2015, here we are seriously considering raising the gas tax when, only six months ago oil was about $100 per barrel. In short, both positions seem shortsighted with little understanding of real impact or history.
Driving to work last Friday, after filing my car with regular gas for $2.59/ gallon, I heard that many States and the Federal government are thinking of raising the gasoline tax given the steep decline in prices. While not a fan of increasing taxes, I thought this might be warranted to offset declining tax receipts resulting from lower gasoline prices. I had assumed the gas tax was, like most other taxes, a percentage of the price per gallon. However, after some quick research, I learned that the gas tax is more akin to an excise tax (in some circles, referred to as a regressive tax that disproportionately impacts those with less) and both the States and the Federal government get a piece of the pie. According to the American Petroleum Institute, the volume-weighted State average is 30.08 cents per gallon and the Federal government charge is 18.40 cents per gallon.
U.S. Gasoline Motor Fuel Taxes by Region
(Cents per gallon)
Source: American Petroleum Institute, DIVER Data Solutions
Because the tax is levied per gallon, lower gas prices will not lead to lower gas tax revenues. One can even argue that lower gas prices may lead to greater consumption, thereby increasing revenues. So, why talk of a tax increase if the change in the price of oil (as reflected at the gas pump) has no negative impact on tax revenue for States or the Feds?
Most advocates of a gas tax increase cite the need for spending on roads and highways and the potential to add construction jobs. Perhaps. While few doubt that bridges and other infrastructure need work, what solution would have been proposed if oil prices had not declined so precipitously? How much of the perceived need for new roads is based on faulty projections of future auto travel?
Source: U.S. PIRG, Frontier Group
If the goal is job creation, we should ask if there is a glut of construction workers counted as unemployed (or any that have left the labor force and are not counted as part of the employment recovery).
BLS data does not suggest so (see DIVER Data Access, Filter or DIVER Data Solutions). BLS data shows that 43 States and over 1,760 counties have a greater percentage of their employed population in the construction industry than one year ago.
Only 7 States (plus PR and VI) have shown declines in the construction share of employment.
Construction Share of State Employment
Source: BLS, DIVER Data Access-Filter Module
Does the violent change in gas prices spell a true correction or is it an overreaction, which will whipsaw back in time? If so, will the tax increase be reversed? Doubtful. Also worth considering is if the increase in the gas tax at the pump would offset some of that new found extra coin the consumer has for spending thereby impacting sales tax receipts on other purchases (which are used for far different and diverse purposes).
If members of Congress and others believe the consumer has more money available to pay more taxes, is this the best use of “new” tax revenue or is this simply an easy way to pass off a tax increase because our elected officials think we won’t notice as we bask in the glow of cheap gas? Come on. First, we were told that the drop at the pump was like an income increase (makes us feel better when wages have been stuck for some time), which was spurring consumer spending, and now they want to further tax our “raise.”
When contemplating the pros and cons of a possible gas tax increase, one should also contemplate the impact of the same on State tax receipts and consumer spending. Not only today, when the price of oil is under $50 per barrel and the cost to fill our tank is low, but also when prices increase either with inflation or more violently due to increased global demand or other factors.
Fed Cites Risks to US from International Weakness
“Many participants regarded the international situation as an important source of downside risks to domestic real activity and employment”
Minutes of the Federal Open Market Committee (December 16-17, 2014)
The minutes from the December Fed meeting highlighted concern that weakness in economies abroad could bleed into the United States. A decline in demand for US exports would be one potential transmission mechanism for this weakness.
With that in mind, we used DIVER Data Access, Filter to identify which States are most exposed to a decline in exports.
Exports as % of State GDP
Source: U.S. Census, BLS, DIVER Data Access-Filter Module
There are 14 States that get more than 15% of their GDP from exports.
Users of DIVER Analytics can drill down to view more details of a State’s export picture, including trading partners (we provide Michigan as an example).
Michigan’s Top Countries for Exports
Source: U.S. Census, DIVER Data Access-Search Module
With China, Germany and Japan among its top trading partners, it is clear that Michigan’s economic health is at risk if we see the international spillovers that worry the Fed.
This week the Lumesis team will be in Philadelphia and Washington D.C.
Have a great week,
Gregg L. Bienstock Esq. & Michael Craft, CFA
CLICK HERE to Subscribe to the Weekly Commentary