Portnoff Financial LLC- Blog

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February 2014

Driving Your Taxes Ever Higher

Driving Your Taxes Ever Higher

I really don’t care for Flo. She is that all-too-cheerful lady that wants to sell you a particular brand of car insurance, one that she claims will save you lots of money. She would also like you to know that you have the option to plug a small device into your vehicle. This device monitors your every move for what is called usage-based insurance. If this device shows the company that you are a safe driver, then the insurance company will offer you a discount. Sounds like a good deal, right?

Unfortunately, Flo’s little device has other, less beneficial uses. A similar device, no longer optional, may one day help the government tax you based on how, when and where you drive your vehicle. Even George Orwell would have been shocked by this level of Big Brother-ness.

The Great Recession has led to many structural changes in our economy and how we behave. One of those changes has been in how we drive.

According to a recent study from the University of Michigan, Americans’ driving habits have changed dramatically in recent decades. The average driver travels 1,200 fewer miles per year than he did in 2005. We also use less gasoline per person than we have in nearly 30 years. The decline in miles driven and fuel consumption has meant a serious loss in revenue for local, state and federal governments.

The United States Highway Trust Fund was created in 1956 and is used for the construction and maintenance of the Interstate Highway System. The Trust Fund receives its money from the federal fuel tax. The tax on a gallon of fuel has been raised over the decades and is now over 18 cents per gallon of gasoline.

But the tax is not enough. The Congressional Budget Office estimates that the Trust Fund will be insolvent this year and will continue to be so for the foreseeable future. By 2023, the Trust Fund is expected to have a shortfall of nearly $100 billion.

The current mechanisms for funding transportation services are already failing. With Americans driving less miles and consuming less fuel the situation will only get worse. This means governments must find ways to gather more tax revenue from drivers.

The most straightforward solution is to increase the fuel tax. The problem with this idea is that the tax will be chasing ever-more fuel efficient vehicles that are being driven less. As a result, a tax hike is unlikely to meet funding needs. This is where the number crunchers will start getting creative.

Luckily for them, and unluckily for us, our friend Flo’s usage-based insurance device can be converted to a usage-based tax calculator. Currently, most use-based vehicle taxes operate as a type of sales tax. With more data, governments will be able to tax our vehicle usage in a multitude of different ways that would get around decreasing vehicle usage and increasing fuel efficiency. Heavy commuters might feel the tax pinch on how many miles they drive, whether they drive in cities or what time of day they drive. On the other hand, those with short commutes will not be able to escape taxes on vehicle speed, condition of the roads used, driving in high-volume areas, driving during harsh weather, etc.

By taxing a variety of usage patterns that are independent of miles driven and fuel efficiency, governments can supplement revenue from the fuel tax. The only way to avoid these taxes will be to turn in your keys.

Our change in driving habits is emblematic of how our behavior has shifted since the economic downturn. Traditional funding pathways for government services are falling behind. This means that we can expect our government to look for more creative and intrusive ways of taking our wealth to fund their services.


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Demographics Are in Good Spirits

Demographics Are in Good Spirits

The world seems to be running dry. Vintners are ramping up wine production, trying to keep pace with ever increasing demand. This means the bottles you are buying today could be significantly more expensive in the next couple of years. But before you run out to the store to load up on your favorite vino, take a minute to consider what caused the casks to run dry…and what might lie ahead.

Global wine production has slackened over the last decade as the industry tried to recover from a glut of supply in the mid 2000s. Some farmers, such as in California, turned their soil over to more profitable crops, with almonds and walnuts paying more per acre.

Meanwhile, demand has been growing at a healthy clip. The increase in consumption has come primarily from two nations: China and the United States. China's rapid economic expansion has given millions of consumers the access to the global wine market in a way that was absent just a decade ago.

It is somewhat excusable for the wine industry to have missed the rise in affluence of China's upper and middle class. It far less understood how the industry failed to anticipate the growth of wine consumption in the United States. Since 2000, U.S. wine consumption has doubled on a per capita basis, and the trend was right there for everyone to see.

The reason for America's growing thirst for wine is, unsurprisingly, demographics.

Based on data from the Bureau of Labor Statistics’ Consumer Expenditure Survey, spending on alcoholic beverages hits a secondary peak during a person’s early-to-mid-20s, and then hits a primary peak during a person’s early 50s. One may not think of 20-somethings drinking wine, but data from the Wine Market Counsel confirms that millennials, along with baby boomers make up the core wine-drinking generations. It also turns out that when you divide the U.S. population into five-year age groups the two largest categories in our economy are those aged 20 to 24 and those aged 50 to 54. Is it any mystery that U.S. demand for wine would grow to its current levels?

Demographics are a powerful force on our economy. Companies and industries that understand their consumers will do well. Harley Davidson smartly reorganized its business model, knowing that its prime consumer base was shrinking. The diaper industry is increasing production of adult products to serve aging populations.

On the other hand, those who ignore demographics do so at their own peril. The wine industry may have just missed a huge opportunity to sell their goods to two very large audiences. As millennials and boomers move past their mid-20s and mid-50s, respectively, they will develop a thirst for something else.


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