How a gas tax hike would slam the economy

The proposed raise will hit the middle class right where it hurts. It couldn't come at a worse time.

By InvestorPlace Jun 23, 2014 1:30PM

Image: Buying gas © moodboard/CorbisBy Anthony Mirhaydari

You know what they say about life. There are only two constants in it: death and taxes (and . . . well, maybe laundry).

Higher taxes are one of the reasons that real disposable household income growth has been so subdued this economic cycle. True, this mainly has been concentrated on the well-to-do. But a new plan under discussion in Washington will hit the middle class right where it hurts: at the gas pump.

I guess nearly $3 trillion in annual federal tax revenue just isn't enough.

Last week, two senators unveiled a bipartisan plan to raise the federal gas tax for the first time in more than 20 years to pay for highway and transit infrastructure. The proposal would raise the 18.4-cent-per-gallon gas tax and the 24.4 cent-per-gallon diesel tax by a total of 12 cents each, spaced out over the next two years. Then to ensure the tax keeps its bite, the taxes would be indexed to inflation.

Of course, that higher gas tax could do plenty to both the American consumer as well as Wall Street.

The reverberations of a gas tax

The atmospherics could hardly be worse, with wholesale gasoline prices surging to mid-2013 highs in response to the rise of an extreme Sunni terrorist group in northern Iraq that threatens key oil infrastructure. That's a problem since the U.S. consumer is under some serious pressure at the moment.

Real disposable personal income is lagging behind a surge in overall inflation -- led by food but also other areas including airlines and hotels -- with the Consumer Price Index jumping to a 2.1 percent annual growth rate in May, above the Federal Reserve's 2 percent target. That's leading folks to tap into their savings and charge up their credit cards. None of this suggests that households are ready to tolerate a further rise in at-the-pump prices.

Looking that chart of wholesale gas prices, a 12-cent increase in the gas tax would put prices right back to all-time highs reached in 2011, 2012 and 2013. Each time, the prices quickly fell back as the economy buckled under the pressure. You can see this in the way the Citigroup Economic Surprise index (which measures where the economic data is coming in against analyst expectations) fell away each time gas prices spiked.

There's no reason to think this won't happen again if the rise in the gas tax goes through, especially given the retrenchment I'm seeing from consumers already.

As for Wall Street, there could be multiple repercussions from a gas tax hike.

If the situation in Japan is any guide -- where they just increased their national sales tax for the first time since the 1990s -- a surge of inflation has slammed the brakes on retail sales in a huge way.

I would expect a similar though less drastic response here at home, with ex-gasoline retail sales suffering and keeping the pressure on retail stocks. The Retail SPDR (XRT) remains in an eight-month-long trading range after multiple failed attempts to push above its November high set back during initial optimism over the 2013 holiday shopping season.

Energy stocks, as represented by the Energy SPDR (XLE), have been on a tear this month, up more than 5.2 percent as potential geopolitical disruptions to the energy supply chain in Iraq as well as Ukraine threatens to boost both crude oil and natural gas prices. That, in turn, would boost the top-line growth of companies in the sector.

They wouldn't enjoy the same lift from a higher gas tax, however, since the additional 12 cents per gallon would simply pass to the U.S. Treasury.

Finally, precious metals would probably be the biggest beneficiary of a gas tax hike because of the trickle-down impact it would have on the overall price level as companies such as UPS (UPS), Southwest (LUV) and Amazon (AMZN) look to pass through the higher expense of fuel to consumers. Gold and silver and the related mining stocks would continue to lift.

Ways to play this include New Gold (NGD) and NovaGold (NG), both of which are up more than 22 percent since I added the two stocks to my Edge Letter Sample Portfolio earlier this month.

More from InvestorPlace

Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters, as well as Mirhaydari Capital Management, a registered investment advisory firm. As of this writing, he had recommended NGD and NG to his clients.

Jun 23, 2014 1:56PM
I think it is a safe bet to say anyone voting on this would be out in the following election. The middle class cannot take another bite out of their disposable income. Nobody is out there joyriding in the first place, thats an acitiviy of the past. Gas is a necessity and not a luxury. What are they doing with the gas tax they already collect?
Jun 23, 2014 2:23PM
Politicians never run out of other peoples money
Jun 23, 2014 1:58PM
Remember "shovel ready jobs" (that weren't so shovel ready)?!  What is the government doing with all of our toll money, and all of the local and state taxes collected to maintain the roads and bridges?  

Before anyone gives another dime of tax money, the citizens should be given an independent audit of all money collected at toll booths and tell us where the $$ REALLY went, and also where our state and local taxes are going.  I'll bet there's tons of waste and corruption there.
Jun 23, 2014 2:19PM
As jobs are lost, raise taxes to keep the money flow constant.  And, bring on forced purchases such as Obamacare and Orrcare in Alabama.  Do this while state lawmakers legally 'hide" about 90 percent of their state salaries as "expenses" and avoid paying taxes on that amount.  We have CROOKS running this country!!!
Jun 23, 2014 2:20PM
We need a 100 million man (and woman) march on Washington!!!
Jun 23, 2014 1:58PM
The problem here is that the collected taxes go overseas to take care of turtles, lazy people, stupid people, and every other idiotic reason  except to what it was intended for. You can up it $1 a gallon and it still won't go for what it is intended. I think that most of it goes for bonuses to federal employees who don't deserve a penny of it. The rest goes to the afore mentioned. Social Security will be next.
Jun 23, 2014 2:27PM

Who were the two senators? The people should know on who not to vote for.

Jun 23, 2014 2:46PM
So my question is if our infrastructure is so bad than why are we shipping billions to countries around the world that hate us.  Why are we still pumping billions in the stock market, aren't the rich... well rich enough yet at our expense?  Why are we wasting millions on studies about the oddity of the duck penis, if there is intelligent life in the universe, etc.  Where is our money actually going?  Why is there no checks and balances in our system to account for every tax dollar spent and distributed?  Why is there no system in place to "audit" and uphold accountability?  Until there is we will continue to have wasteful spending and corruption.  Think its time to let our votes speak this midterm and get all these people Dem's And Repub's out and get some people in who will make the tough changes necessary to move our country forward in an accountable and self sufficient manner.
Jun 23, 2014 2:14PM
Gas should be taxed a little higher.  Property taxes should go up a little.  Sales taxes should increase a little. SS taxes should go up a bit.  SS should go down some.  Salaries should go down a little.  Excise taxes should increase some.  Interest rates should go up.  Earned interest should decrease a little.  All taxes should increase just a bit. All income should decrease some.  Maybe then the revolution would start and get the clowns out of washington who created this mess.  For now, they should keep loading the ox cart.  The ox will balk one day.
Jun 23, 2014 2:04PM
These democrats who tax & tax us are the most two faced, bait & switch, lying, double standard, hypocritical, untrustworthy, maniacal, mean, self centered, plastic, posing, vain, idiotic, dimwitted, short sighted, unpatriotic, ignorant, impotent, weak, so-called leaders in the whole world ever !
Jun 23, 2014 2:10PM
it doesn't bother the Politian's in Connecticut. highest gas tax in the country and still bad roads. Just another revenue stream and more money to spend
Jun 23, 2014 2:09PM
And how much of the increase is allowed to be transferred to the general fund??????
Jun 23, 2014 2:09PM
After the disaster known as the lying POS Oblamo, how could the rest of the idiots even contemplate this middle class disaster. And the items such as gasoline and food do not go into the inflation numbers for Social Security recipients. Go ahead and screw the middle class and seniors you bunch of morons. Can't wait to vote against you. You would be as worhtless as the amateur POTUS (the most expensive on the job training project in history).
Jun 23, 2014 2:15PM
Do electric cars pay this use tax?? They use the roads don't they??
Dear president Obama and progressive liberals please don't let your ideology prevent you from wrecking the economy, oh wait you haven't, nevermind.
Jun 23, 2014 2:13PM

i'm glad I bought a hybrid 10 years ago. 


I knew gas would always go up, but was just never sure just how much and just how fast. 


the state of California - our wonderful governor jerry brown - has ALSO raised the state tax to build his crazy high speed train!


isn't that fantastic?!?!?!!?


(what an idiot)

No matter how much they raise the tax no one will see an appreciable increase in the quality of our roads. There will be no accounting of where the new revenue goes and as more companies choose to move overseas for lower taxes it will offset the new taxes not to mention the lost taxes from the jobs that will also go overseas.
Jun 23, 2014 2:26PM
It's only good for the junks who passed the Gas Tax for their benefits. We should throw them overboard instead.
Jun 23, 2014 2:15PM
Yes why not raise the gas tax?  Then instead of EBT cards there could be gas cards.  This will obviously cater to the dependency class voting block and their political handlers.  Of course it will probably drive even more businesses overseas, cause a greater exodus among the 1% and retirees, but the redistribution of wealth will continue with those that remain.
Jun 23, 2014 3:42PM

Hey, here's an idea.....lets take some of the foreign aide that is stolen from the U.S. taxpayers every year......I don't know, may be just $20 billion or pay for this. Better yet, let's stop ALL foreign aide and use our tax dollars at home where we need them to build bridges and roads.

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