Merry Christmas! Gas Price Decline Is Like a Tax Cut

Thanksgiving Travel Vignettes Nebraska
Nati Harnik/AP
Most Americans have received the equivalent of a significant tax cut. No, Congress did not suddenly agree to do something, and no, President Obama did not issue an executive order. (He may be able to do that on immigration, but not on taxes.)

What has happened is that gas prices have unexpectedly plummeted to the lowest level in more than four years, and that means extra disposable income for most Americans to spend. "It could be as much as $40 billion in people's pockets in the fourth quarter," said Robert Brusca, chief economist at Fact and Opinion Research.

According to AAA, the national average for a gallon of regular is $2.77, down nearly a dollar from this year's high of $3.70 a gallon back in late April. For the typical person driving 15,000 miles a year who gets 22.5 miles per gallon, the lower price works to an annual savings of about $620. "This is essentially found money," said Tracy Noble, a AAAMidAtlantic spokesperson. "We expect prices to continue to drop through the end of this year. We're hoping to see $2.50 a gallon by the end of the year and into early next year."

Lower-Income Workers Feel Greatest Benefit

The savings are especially important for low- and middle-income Americans. Economists say the benefits represent a very democratic tax cut, with the extra $40 to $50 a month to spend being of greater benefit to lower-income earners.

"It's awesome," said Sheila Castro of Plainsboro, New Jersey, as she filled up her car at an Exxon (XOM) station along U.S. Route 1. "I'm saving about $30 a month. Right now I'm just saving it. I'll put the money toward a vacation so that I can go to the Dominican Republic, back to see my family."

The cheaper price of gas is also a boon for the overall economy. "I think for the most part those extra dollars will be spent," said Brusca. "I don't expect that people will keep track of those extra dollars and save it or spend it on big-ticket items. They're more likely to spend it at restaurants and bars."

He also says those dollars have a multiplier effect on the economy. "I save money on my gasoline and spend it at the toy store, which will then hire more workers, who will spend more money." Brusca said this will provide a "measurable plus for the economy," boosting fourth-quarter gross domestic product by 0.2 percent o 0.3 percent. In general, economists estimate that every penny energy prices drop results in an additional $1 billion in household spending each year.

Lower Heating Costs Expected, Too

Walmart (WMT) and other retailers have confirmed that they're seeing an immediate benefit from lower gas prices. The retail giant recently reported its first quarterly sales gain since 2012. Its president said "there is no doubt" that it is being helped by lower gas prices. A Bank of America (BAC) Merrill Lynch study found that families with annual income of less than $50,000 spend more than 20 percent of their take-home pay on energy, more than double the rate spent by families earning more than $50,000 a year.

Another boost to the family budget could come this winter with the lower cost of heating oil and natural gas. Some experts say it could provide an average savings of at least $400 this winter, compared to last winter.

At that Exxon station, Antonio Moriello of Lawrenceville, New Jersey, was filling his SUV, something he needs to do about twice a week as he commutes from home to Rutgers University. A college senior majoring in psychology, Moriello figures he's saving more than $80 a week. "I'm saving that money for grad school. It will make a big difference."

"I'm retired now, so I'll probably use it to pay the electric bill," said Lona Raymond of South Brunswick, New Jersey. "It really helps balance the monthly budget."

Personal finance advisers say this is a good time to revisit your budget, with the year coming to an end and an unexpected windfall of money that can be reallocated to save, pay down debt, or increase discretionary spending.
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