More On Tax Planningfrom The Advisor's Professional Library
- Selected Provisions of the American Taxpayer Relief Act of 2012 The experts of Tax Facts have produced this comprehensive analysis of selected provisions of the American Taxpayer Relief Act of 2012 (the Act) to provide the most up-to-date information to our subscribers. This supplement analyzes important changes to the tax code with emphasis on how these developments impact Tax Facts’ major areas of focus: Employee Benefits, Insurance, and Investments.
- Pay-to-Play Rule Violating the pay-to-play rule can result in serious consequences, and RIAs should adopt robust policies and procedures to prevent and detect contributions made to influence the selection of the firm by a government entity.
Government at all levels will frequently use its taxing authority to encourage or discourage selected behavior as it deems necessary. Last week, we discussed how the depreciation allowance encourages real estate investment which bolsters the rental market. In this post, we'll tackle taxes on gasoline and cigarettes. As a disclaimer, there are times when what appears to be an effort to change behavior is really just a money grab. The gas tax may be one of these. That said, before you head to the pump or buy that next pack, you might want to read this.
Most of us use gasoline on a regular basis and most understand that the price we pay at the pump includes the actual cost of the product plus a variety of taxes. Outside the cost of the commodity itself, there is a federal excise tax, a state excise tax, a few other miscellaneous state taxes, and in some localities, an additional tax is inserted. The federal gasoline excise tax began with the Revenue Act of 1932 at a mere one cent per gallon (cpg). The first state to levy a tax on gasoline was Oregon in 1919 at 5 cpg.
The federal excise tax has increased over the years until it hit the current level of 18.4 cpg in 1997. This increase is roughly equivalent to the rate of inflation. However, with the onset of the 2008 financial crisis and shackled with a mandate to balance their budgets, the gas tax at the state level has been much less stable. Some of the largest increases since 2009 have come from Georgia, Hawaii, California, Connecticut, New York, and Indiana.
In New York (excluding the federal excise tax), if you include the state excise tax and other taxes and fees, it adds up to 50.6 cpg, leaving it with the dubious distinction of "Highest in the Nation" for 2013. Following New York is California with a state gas tax burden of 48.7 cpg. Then comes Hawaii (47.1 cpg), Connecticut (45.0 cpg), Illinois (39.1 cpg) and my state of birth, Michigan (38.7 cpg). Which is the state with the lowest state gasoline tax? It's Alaska at only 8.0 cpg.
Ultimately, elevated gas prices would strengthen the argument for alternative fuels. If you convert the amount of natural gas it takes to equal a gallon of gasoline, if it cost much less gasoline, government could actually levy higher taxes and the consumer would still come out paying less. Think about it!
Cigarette use is perceived by many as a public health risk and as such is another target of government taxation. On February 4, 2009, President Obama signed into law the Children's Health Insurance Program Reauthorization Act of 2009 which raised the federal tax rate on cigarettes from $0.39 per pack to $1.01. Will higher prices increase revenue or reduce cigarette sales? According to Gary Becker, a Nobel prize-winning economist who has studied the price elasticity of cigarettes, this increase will result in a decrease in unit sales of 10.6%. Would the big picture be a reduction in cigarette related diseases and subsequent savings to our health care system?
Beer tax, wine tax, cell phone tax, grocery tax, property tax, income tax tolls and fees, etc. With so many tax options, government officials are surely busy looking for ways to increase revenue. And if they can do it in a way that encourages healthy behavior, I'm confident we'll be hearing about it. Come to think about it, I have noticed a lot of commercials targeting smokers coming from the Department of Health and Human Services. Should we expect another round of cigarette taxes soon?
My sources for this blog: U.S. Census Bureau, The Tax Foundation, The American Petroleum Institute, RJ Reynolds and state revenue departments.