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Higher gas prices are eating into Trump tax cut, trimming spending by Americans

USA TODAY logo USA TODAY 5/13/2018 Paul Davidson and Nathan Bomey

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The tax cut giveth, and higher gas prices taketh away.

Rising pump prices are blunting the positive effects of sweeping tax cuts on Americans' spending, potentially undercutting a pillar of economic growth this year.

President Trump’s decision this week to withdraw from the Iran nuclear deal and reinstate sanctions against that oil-rich country could constrain global supplies, further pushing up crude and gasoline prices.

“While the tax cuts have lifted take-home pay for the vast majority of workers, rising gasoline prices are eating into that benefit,” Morgan Stanley said in a note to clients this week.

More: Is gasoline headed back to $3 a gallon? It's already higher in some states

Felicia Smith, 51, of Silver Spring, Md., says the tax cut overall has left an additional $30 in her biweekly paycheck, and the money is automatically going into a savings account.

“Thirty dollars is not going to make or break me,” she says. But, she adds, the higher gas prices are “killing me.”

The national average price of regular unleaded gasoline touched $2.84 a gallon Thursday, up 18 cents the past month and 50 cents the past year. Gas has spiked in recent weeks due mainly to increasing oil prices as the Organization of the Petroleum Exporting Countries (OPEC) maintains strict production limits despite global economic growth.

Smith, who commutes 35 miles to her job as an office manager, says she’s spending about $7 more on her weekly fill-up.  As a result, she’s driving fewer days and combining errands — such as to the supermarket and hairdresser — and eating out once a month, down from her usual twice.

Although she’s still coming out a bit ahead after figuring in the tax cut, the higher gas prices seem more tangible, she says.

The tax reform reduces rates for individuals and married couples, with the top rate falling from 39.6% to 37%, and it expands the child tax credit, among other benefits. The average middle-class American is expected to save about $930 in 2018 taxes under the law, according to the Tax Policy Center.

The jump in gasoline prices the past year, if sustained, would cost the average American $450 a year, offsetting about half the tax benefit, says Mark Zandi, chief economist of Moody’s Analytics.

As a result, “the tax cuts will be a boost to the average American, not a boon,” Zandi says.

In February, the new law began reducing the federal taxes withheld from workers’ paychecks. But there’s little sign that has juiced consumer spending so far. Even before factoring in the cost of gasoline, a key measure of retail sales was up 0.4% in March, following a flat reading in February and a 0.1% dip in January.

Barb Steuver, 64, of Grand Haven, Mich., a travel agent, is netting about $30 more in each biweekly paycheck, but it goes into savings for possible emergencies. “It’s for things I can’t control like grocery prices, gas prices … car repairs.”

“I don’t see the fingerprints of the tax cuts on consumer spending“ yet, Zandi says. That’s partly because people are slow to change their spending patterns, he says, adding that the higher gas prices are also a factor.

Low-income households, who tend to spend more of their paychecks, are disproportionately affected by higher gas prices. The bottom fifth of households in terms of income spend 8% of their earnings on gasoline, while the top fifth spend just 1% of their income on fuel, according to Morgan Stanley.

Some economists predict that gas prices will retreat later this year, but there’s also a growing risk that they’ll climb higher.

The renewed U.S. sanctions on Iran could nudge up pump prices 10 cents to 15 cents by Memorial Day, says Patrick DeHaan, senior petroleum analyst at consumer information app GasBuddy. The price of U.S. benchmark crude oil, meanwhile,has risen 3.3% the past two days to $71.36 Thursday following the Iran news. 

Assuming gas prices are flat the rest of the year, the higher gas prices  would lower the half-percentage-point increase in economic growth that the tax cuts are expected to deliver to a quarter point increase. That difference could trim growth this year from 3% — a revved-up level that Trump has promised — to 2.75%.

Some people aren't feeling the fuel pinch. Cynthia Woltjer, 58, of Indianapolis, is seeing an extra $48 in her biweekly paycheck from the tax law. She has a short commute to work as an administrative assistant and so she’s not noticing pricier gas. She and her husband are going out for dinner weekly, up from twice a month.

“I don’t look at it so closely” anymore, she says. But, she adds, “We aren’t ready to buy that vacation home yet!”

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