Why Did The IRS Mileage Rate Rise In 2008?

If you’ve read our other articles, you may already know that the IRS standard mileage rate can change twice yearly – but why would it do that? 

The means of grasping the concept of mid-year rate changes is by looking at specific case studies. 2008, for instance, was one of the most significant years in the history of the United States. Undoubtedly, the events of that time influenced the IRS’s approach to the standard mileage rate.

It was shaping up to be quite the year: Obama had just been elected, and an artist named Lady Gaga had just released her first single on the Billboard Top 100. But that all changed on March 16, when a bank named Bear Sterns closed its doors after losing 3.2 of its 11.1 billion dollars in capital during the collapse of its “High-Grade Structured Credit Fund.”

We know how the rest turned out. You probably understand the subprime mortgage crisis if you’ve seen The Wolf of Wall Street, Moneyball, or The Big Short. Even if you haven’t seen those films, you may know someone who was laid off or lost their mortgage during these unstable macroeconomic conditions. With that in mind, this article examines the IRS literature about its press releases from 2008 and ties increases in the mileage rate to a gas price bubble.

How Many Times Did The IRS Change The Standard Mileage Rate In 2008? 

The IRS made two adjustments to the standard mileage rate in 2008. The first change was announced on November 27, 2007. The IRS press release announced that “on January 1 2008, the standard mileage rates for using a car (including vans, pickups or panel trucks) will be 50.5 cents per mile for business miles driven.” [1]

Just eight months later, the IRS released a second press release announcing the standard mileage rate would be increased by a whopping eight cents per mile, its most significant single increase to the rate since 1989. What happened between January and June of 2008? We’ll examine some of the IRS literature to find out.

Which Factors Influence The IRS’s Decision To Raise Or Lower Its Standard Mileage Rates?

The factors influencing the standard mileage rate change are the same in 2008 as today. The rate is calculated internally by the IRS but is based on an annual study produced for the IRS by a third-party contractor, which changes from year to year. This study is an overview and statistical analysis of the approximate driving costs for the average American during the year.

The IRS decides to raise or lower rates based on their interpretation of this third-party study. Their exact criteria aren’t public, but they provide some clues.

“While gasoline is a significant factor in the mileage figure,” writes the IRS, “other items enter into the calculation of mileage rates, such as depreciation and insurance and other fixed and variable costs.” [2] 

The Oil Shock Of 2007-2008 And The Cost Of Driving: Why The IRS Changed The Rate In ‘08

Our first clue about why the IRS raised rates in 2008 is right under our nose – in the press release issued by the Internal Revenue Service. The IRS writes that the increase of eight cents per mile to the standard mileage rate was “in recognition of recent gasoline price increases,” claiming that “rising gas prices [were] having a major impact on individual Americans. [A]djusting the standard mileage rates…better reflect the real cost of operating an automobile.”

They were correct. CNN ran a poll on higher gas prices in February of 2008 and published responses from ordinary American respondents who, at the time, claimed they had to dramatically cut back on non-essential purchases to afford gasoline for their cars. [3]

Hindsight often provides clarity, but it does not apply to incidents like a temporary increase in gas prices. Unless the change is severe, it can be hard to recall a few years out, as governments tend to take stabilizing action against rising gas prices to avoid civil unrest.

James D. Hamilton, a professor of economics at UC San Diego, writes in his paper “Causes and Consequences of the Oil Shock of 2007-2008” that in 2007, “the path of oil prices steepened sharply, sending the nominal price to an all-time high of $145 a barrel on July 3, 2008, only to be followed by an even more spectacular price collapse.”

Considering this price peak happened on July 3^rd, about three weeks after the IRS released their rate increase press packet, it’s understandable that the IRS would have adjusted the rates in the middle of 2008; the cost of driving had dramatically increased over that year.

Hamilton speculates about some of the causes of the oil price shock, pointing to protests that blew up a pipeline in Nigeria in 2006 and Gulf hurricanes in 2005, but suggests that this price bubble and subsequent collapse was mainly due to increased demand rather than any specific threat to oil production worldwide.

What Does This Historical Example Teach Us About IRS Mileage Allowances? 

By looking at the past, we can understand the present. We’re in another economic turmoil, the worst one since 2008 and its aftermath. It’s no surprise that after years of increased prices on everything from food at the grocery store [4] to used cars, [5] the IRS has decided to continue raising its standard mileage rate to ensure the average taxpayer gets a fair break.

We can surmise that the IRS is very likely to raise their standard rate in a period where the price of gas has increased significantly, even if temporarily (remember their 2005 rate change after Hurricane Katrina) or in periods of significant inflation, which were largely under control in the West over the last two decades. 

How Many Times Will The IRS Raise The Standard Mileage Rate in 2024?

Unless there is another big economic or energy shock, the average year is far more likely to see only one rate update.

Regarding the prevailing economic and energy conditions going into next year: many economists and opinion columnists are calling for a recession next year after the full impact of raised interest rates ripples through the economy. Others are not so sure, so the jury is not in.[5.5] Most homeowners will only “feel” the effect of higher mortgage payments after their renewal date, whereas a sudden increase in gas prices will produce immediate wallet-tightening effects. 

There is a delay between when central banks decide to raise interest rates and when the average person notices their purchasing power has decreased. If interest rates peak this year and decline the next, we will likely see reduced consumption as ordinary people feel the impact and save money wherever possible. In turn, that reduces the amount of capital flowing through the economy, having knockdown effects on the economy.

We can also look to 2008 to understand that. We can think for example of how the 2008 subprime mortgage crisis reverberated slowly through the U.S. economy. It can take time for a given event’s economic outcomes to appear in the big picture.[6]

The IRS has a history of moving quickly during significant economic downturns. Lowering the amount of tax they take in provides an immediate stimulus to the U.S. economy while reducing tax revenues available for infrastructure in the long run.

Bookmark Cardata’s blog to find out about IRS rate increases first.

Sources 

[1] 2008 Standard Mileage Rate | Internal Revenue Service 

[2] Causes And Consequences Of The Oil Shock Of 2007–08 | Brookings Institution 

[3] Gas Prices Straining Budgets | CNN 

[4] Summary Findings | USDA ERS 

[5] Used-Car Prices Remain High, Making Buying A Challenge | Consumer Reports 

[5.5] Will the U.S. Get Hit With a Recession in 2024?

[6] Subprime Mortgage Crisis | Wikipedia

Disclaimer: Nothing in this blog post is legal, accounting, or insurance advice. Consult your lawyer, accountant, or insurance agent, and do not rely on the information contained herein for any business or personal financial or legal decision-making. While we strive to be as reliable as possible, we are neither lawyers, accountants, or agents. For several citations of IRS publications on which we base our blog content ideas, please always consult this article: https://www.cardata.co/blog/irs-rules-for-mileage-reimbursements. For Cardata’s terms of service, go here: https://www.cardata.co/terms.