Gas prices will likely wipe out Trump tax cut gains for millions

In this article:

Gas prices have risen this month. And if they rise $1.05 per gallon off their current marks, it would eat the disposable income gains of last year’s tax cut legislation, according to Deutsche Bank analysis.

The national average is now $2.76 a gallon, according to GasBuddy, which is close to the most recent high in mid-2015. A $1 gain per gallon would represent a full return to the soaring prices of 2014, when the average price for a gallon approached $3.70. From 2011 to mid-2014, prices were at this level.

While a $1 increase would be required to cancel out benefits for families of all income levels, lower-income families’ gains would be wiped out much more quickly.

Gas is a bigger percentage of the budget for lower-income Americans. And the tax cut benefits higher-income Americans substantially more. (Deutsche Bank)
Gas is a bigger percentage of the budget for lower-income Americans. And the tax cut benefits higher-income Americans substantially more. (Deutsche Bank)

In fact, Deutsche Bank analysts expect this to happen sometime this year for these lower-income groups, as the rise in disposable income gets eclipsed by rising oil and gas prices.

Lower-income families usually spend a higher percentage of their budget on gas, making price changes more pointed. The lowest-earning 20% of American families spend 8% of their household budget on gas and oil. For the top 20%, it’s less than 2%.

But that’s not the only factor. The tax cuts heavily favor wealthier households, giving them more of a push even if they’re paying more in gas. For the bottom 20% of families by income, the tax cut gains are only around $50, according to the U.S. government’s Joint Committee on Taxation. At the same time, a household that earns $200,000 would save $12,000. At 2014 prices — the worst-case of gas prices in recent memory — that would pay for 81,075 miles in a 25 mpg vehicle.

According to Deutsche Bank, the relationship of disposable income and energy has long been a tight one. For every one-cent rise in gas prices, consumer spending on non-energy goods and services has fallen $1.16 billion. So thus far, from last year, analysts are expecting a reduction of income allocated to non-energy stuff to fall by $35 billion.

Gas is cheaper than it was in 2014, but we’re approaching the most expensive point in three years. (Gas Buddy)
Gas is cheaper than it was in 2014, but we’re approaching the most expensive point in three years. (Gas Buddy)

Ethan Wolff-Mann is a writer at Yahoo Finance. Follow him on Twitter @ewolffmann. Confidential tip line: FinanceTips[at]oath[.com].

Online-only savings accounts are banking’s best-kept secret

What millennial investors should be learning from 2018

Advertisement