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Rising gas prices offset payroll tax savings

Consumer savings from the payroll tax cut, which lawmakers just voted to extend for another year, were erased by higher gasoline prices. The same scenario is likely this year. Here, the price for gasoline is displayed at a Shell gas station on April 27, 2011 in San Francisco, Calif.

Adriene Hill: Coming up, the global perspective on business and economics. But first to Washington, where we're expecting lawmakers will today pass an extension of the payroll tax holiday. The cut is worth about $1,000 a year to the average family. And economists are hoping that extra money could stimulate the economy.

But as John Dimsdale reports, there's a problem with the plan: rising gas prices.


John Dimsdale:  At a national average of $3.52 cents a gallon, gasoline prices have jumped 8 percent this year. 

Trevor Houser:  Increasing gasoline prices just in first six weeks of this year have already reduced monthly household income by about $40. 

That's Trevor Houser, an economist at the economic research firm Rhodium Group. With the average family getting around $85 a month from the payroll tax holiday, already almost half has been eaten up by gasoline. And if prices hit $4 a gallon by this summer?

Houser: So if we get that much of an increase again, that will have pretty much completely eroded the effects of the payroll tax cut. 

So much for economic stimulus. Economist Chris Christopher at IHS Global Insight says there is one way to avoid some of the drain on the household budget. 

Chris Christopher:  As gas prices go up, and they're going to go up,  people tend to shop more at home.  

Putting computers and smartphones to work and letting UPS, FedEx and the Post Office struggle with prices at the pump.

In Washington, I'm John Dimsdale for Marketplace.

About the author

As head of Marketplace’s Washington, D.C. bureau, John Dimsdale provides insightful commentary on the intersection of government and money for the entire Marketplace portfolio.

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