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.
On Wednesday, 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-cents-per-gallon gas tax and the 24.4 cents-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
Click to Enlarge 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% annual growth rate in May, above the Federal Reserve’s 2% 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.
Click to Enlarge 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% 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% since I added the two stocks to my Edge Letter Sample Portfolio earlier this month.
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.
