Most of tax cut goes into gas tank

Associated Press

WASHINGTON

Americans are earning and spending more, but a lot of the extra money is going into their gas tanks. Gas prices have drained more than half the extra cash Americans are getting this year from a cut in Social Security taxes.

Unlike some other kinds of spending, paying more for gas doesn’t help the economy much. Most of the money goes overseas, and higher prices leave people with less money to buy appliances, computers, plane tickets and other things that can be postponed.

“When food and gasoline prices are rising, it causes people to hunker down,” said Chris G. Christopher Jr., senior economist at IHS Global Insight.

Consumer spending jumped 0.7 percent last month, and personal incomes rose 0.3 percent, the Commerce Department said Monday. Both gains reflected the cut of 2 percentage points in the Social Security tax, raising take-home pay.

They also illustrated how higher gas prices are stressing household budgets. After adjusting for inflation, spending rose just 0.3 percent. After-tax incomes actually fell 0.1 percent.

The Social Security tax cut will give most households an additional $1,000 to $2,000 this year. In December, when President Barack Obama signed it into law, economists predicted higher take-home pay would lead to more spending and stronger economic growth.

But gas prices have jumped more than 50 cents a gallon this year. In late December, they hit $3 a gallon for the first time in two years. Last week, they averaged $3.58 nationwide, according to AAA’s daily fuel-gauge survey.

Mark Zandi, chief economist at Moody’s Analytics, has reduced his forecast for 2011 economic growth from 3.9 percent to 3.5 percent, in part because of gas prices. That still would be better than last year’s 2.9 percent growth and the biggest expansion since before the recession.

Still, much of the anticipated benefit from the tax cut will be lost. Christopher estimates half to two-thirds of the extra cash ultimately will go toward higher gas prices. Food prices also have risen in recent months, he noted.