"Gasoline Taxes and Consumer Behavior"
Belfer Center Programs or Projects: Environment and Natural Resources
The gasoline tax is an important policy tool to control externalities associated with automobile use, to reduce dependency on oil imports, and to raise government revenue. Automobile use imposes externalities including local air pollution, carbon dioxide emissions, traffic accidents, and traffic congestion. Although the gasoline tax is not the theoretically optimal tax for all of these externalities, a single tax avoids the need for multiple instruments and offers an administratively simple way to control these externalities at the same time. Besides correcting environmental externalities, the gasoline tax can reduce gasoline consumption and may mitigate concerns about the sensitivity of the U.S. economy to oil price volatility, constraints on foreign policy, and other military and geopolitical costs. Moreover, gasoline taxes at the federal and state levels are major funding sources for building and maintaining transportation infrastructure.
Growing concerns over climate change, air pollution, energy security, the national budget deficit, and insolvency of the Highway Trust Fund have brought renewed interests in increasing state and federal gasoline taxes. Understanding how gasoline tax changes affect automobile use and gasoline consumption is crucial in effectively leveraging this instrument to achieve these policy goals. An underlying assumption used in previous policy analysis on the effectiveness of higher gasoline taxes and the optimal gasoline tax is that consumers react to gasoline tax changes similarly to gasoline price changes. Consequently, the consumer response to oil-price induced changes in gasoline prices is often used as a proxy for the response to a commensurate change in the gasoline
The recent economics literature finds that consumers respond little to rising gasoline prices at least in the short run. Together with the maintained assumption, these estimates suggest that a large increase in the gasoline tax would be required to significantly reduce fuel consumption. Not only may this exacerbate the perceived political cost of increasing gasoline taxes, but it may partially explain why U.S. policy makers have tended to favor less-salient fuel economy standards over gasoline taxes, despite the broad conclusion of a long literature examining the Corporate Average Fuel Economy Standards that gasoline taxes are more cost-effective in achieving targeted fuel reductions.
This paper tests the maintained assumption that consumers respond to gasoline tax and tax-exclusive price changes in the same way. It estimates consumer responses to gasoline taxes by decomposing retail gasoline prices into tax and tax-exclusive components. Three outcomes are used to examine consumer behavior over short time horizons: gasoline consumption, vehicle miles traveled (VMT), and vehicle fuel economy (miles per gallon, MPG). Two separate data sets are employed in the analysis: aggregate state-level data is used to examine gasoline consumption, and household-level data that is used to analyze VMT and MPG. The findings reveal that rising gasoline taxes are associated with much larger reductions in gasoline consumption than comparable increases in gasoline prices.
The results from the baseline specification suggest that a 5-cent increase in the gasoline tax reduces gasoline consumption by 1.3 percent in the short-run while an equivalent change in the tax-exclusive price reduces gasoline consumption by 0.16 percent. Although this paper focuses on short-term responses, the large effect of taxes on MPG suggests that the long run response to taxes may also be greater than the long run response to tax-exclusive gasoline prices. The analysis herein shows that the gasoline tax has a stronger effect on VMT than the tax-exclusive price, but the difference is not precisely estimated.
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