Cooler Heads Abandon a Gas Tax Increase

For the past 6 years, consumers endured economic bad news ranging from disappointing to terrible.  Their chance of finding a good new job is so dismal that millions stopped looking.  The middle-class saw their wages and salaries stall or declined.  Their financial net worth declined a shocking 19%.  For many, the value of their home remains mired at a 2006 level and many owe more than the house is worth.  With such a stream of bleak news, consumers had to smile when crude oil prices began a slide in 2013 that accelerated in 2014.  Something was finally breaking their way.

The consumer’s good fortune gushed from freshly fracked US wells that added to worldwide oversupply.  The consumer’s luck improved when Saudi Arabia refused to trim its crude production and instead let prices fall into the mid $40s per barrel.  Although consumers benefit from low prices at the pump, producers generally cannot recover their costs at the current price level, so American fracking ground to a halt.  Saudi Arabia still rules the petroleum world with its vast reserves and ultra-low cost of production, so Saudis have the freedom to let prices slip even further or cut production to establish a higher price.

For Saudis, there are strong arguments for low prices.  Saudi Arabia is demonstrating that they can push prices far below the development cost of new US wells.  That intimidates investors who might fund US domestic wells in competition against the Saudis.  Low prices also damage Saudi Arabia’s main political rival, Iran, which needs a price above $100 per barrel to fund its huge entitlement and defense programs.  Russia and Venezuela are likewise damaged by prices below $100 per barrel.

In mid-January 2015, US consumers faced average retail gasoline prices of $2.15 per gallon for the various blends and octanes, a price much lower than at the end of 2013.  Compared with December 2013, current gasoline prices have decreased consumer cost of living by $162 billion yearly.  That is the equivalent of 1.8% of US wages and salaries.  It is more beneficial than the miserly 1.1% growth in wages and salaries in the same period.  Together, the gasoline price windfall and the stingy wage growth are equivalent to a 2.9% boost in income, an outcome better than consumers have seen in years.  While our unemployment rate has dropped from 10% to 5.6%, average hourly earnings have risen just 10% over the entire 5 year period ending December 2014.  There has been scant progress for consumers during the recession and its weak recovery.

As gasoline prices plummeted, a few advocates for higher taxes initially thought it was a perfect time to hike the federal gas tax.  They thought consumers might not mind losing the extra $1,000 in their pockets.  But this tax increase was a gamble that could go wrong quickly.  Consumers are painfully aware of the 5 years of flat wages, and they treasure lower gas prices.  Furthermore, a gasoline tax increase could be quickly followed by a reversal in Saudi Arabia’s pricing strategy.  For now, advocates for higher taxes have resisted stealing consumers windfall.  Sometimes the consumer wins, just not often enough.

Alan Daley is a retired businessman who writes for The American Consumer Institute Center for Citizen Research