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Low- & Middle Income Consumers Hit Hardest by Higher Energy Prices

Wednesday, September 29, 2004
Adam Goldberg, CU, (202) 462-6262
Mark Cooper, CFA, (301) 384-2204

Study Shows High Prices Take Disproportionate Share of Income of Low-, Middle-Income Consumers

(Washington, D.C.) – A new analysis released today by Consumers Union (CU) and the Consumer Federation of America (CFA) shows that low- and middle-income consumers are spending a greater share of their household income on their energy needs than wealthier consumers.
The study demonstrates that while wealthy households consume more energy than middle-income households, which in turn consume more than low-income households, consumption does not increase as fast as income. Therefore, wealthier households spend a much smaller share of their income on their energy needs. And, because energy is a basic necessity of daily life, households have trouble cutting back when prices rise, meaning that low- and middle-income consumers are hurt more by rising prices.
“Low- and middle-income consumers are really getting skewered by higher energy prices, while higher-income consumers don’t suffer as much,” said Adam Goldberg, a policy analyst with Consumers Union, publisher of Consumer Reports.
Mark Cooper, CFA’s director of research and author of the report, noted that “upper-income households have seen their bills for petroleum products rise from about 2.1 percent of household income to a projected 2.7 percent between 1999 through the upcoming winter, middle-income households have seen an increase from about 5.1 percent to about 6.3 percent. For lower-income households, the increase has been much more dramatic – increasing from about 16 percent in the 1998 to 2000 time period to about 22 percent for this upcoming winter. For those lower-income households without an automobile, and therefore no increased gasoline costs, their home heating expenses have increased from about 6 percent to about 9 percent of household income.”
In addition, the report shows that while the recent tax cuts helped cover some of the increased energy costs of the last couple of years, those savings have now been wiped out. Moreover, since the tax cuts targeted upper-income households, low- to middle-income households received less of a break from high energy bills through the tax cuts than their wealthier neighbors.
“Not only are they getting hit by higher energy prices,” Cooper continued, “but now they have less to spend on other consumer items. This disparity is not only bad for low- and middle-income consumers, but also for the stores where they typically shop. If consumers have less to spend, these retailers are going to see revenues slide. That’s bad for the whole economy.”
“This is a massive hidden tax on low- to middle-income consumers,” continued Goldberg. “And now it’s becoming a hidden tax on business as well. The federal government needs to take a much more aggressive approach to dealing with high energy costs. The whole economy is suffering because of higher energy costs, and it’s only going to get worse if we don’t take constructive action to deal with the reality of rising energy prices.”
For a copy of this analysis, and more comprehensive proposals on how to deal with rising energy prices, please click here.