Will Increasing the Gasoline
Tax Decrease Gasoline
Consumption?: A Review of
the Literature
Julia Michaels
Oral Presentation #2
ECON 539 Public Policy Analysis
Why would we want to reduce
gasoline consumption?

Environmental Reasons



Social Reasons



Pollution
Global Warming
Traffic congestion
Car accidents
Political Reasons

Dependence on foreign oil, as well as
dependence on a single fuel source, is a national
security risk.
Three Public Policy Solutions
1. Stricter Corporate Average Fuel Economy
(CAFE) standards for new vehicles
2. Mileage-based taxes (i.e. the proposed Vehicle
Miles Traveled (VMT) tax and the Pay-As-YouDrive (PAYD) insurance policy)
3. Increasing the federal gasoline tax
Paper focuses on the gasoline tax, although the other
two policy options are discussed as well.
Goals




Policy must be effective
Policy must maximize benefits and minimize
costs
Policy must reduce or eliminate the
externalities of fuel consumption (relates
back to effectiveness)
Policy must be politically acceptable,
maximizing expected support and minimizing
political opposition
Issues within the Literature

Theory: finding equilibrium

Present value

Effects on externalities?

Unintended consequences

Political considerations
Tax Theory:
Finding Equilibrium




There is an optimal tax level that will maximize
government revenue (Hettich and Winer, 1988).
Authors use the Laffer Curve to locate the optimal
tax level
On the ascending portion of the curve, tax is too
low and does not maximize government revenue
On the descending portion of the curve, tax is too
high and incites political opposition (in addition to
decreasing revenue)
The Laffer Curve
Present Value




There is already a gasoline tax in place, so
policymakers do not have to introduce a new policy
Tax increases can take effect immediately, and
start reducing consumption right away
Many alternatives, such as stricter emissions
standards for new vehicles, will take years to fully
implement
Savings provided by gasoline tax today
outweigh those of policy alternatives, according
to concept of present value (Austin and Dinan,
2004).
Effects on Externalities?



The whole point of reducing gasoline consumption
is to reduce or eliminate externalities caused by
excess consumption
Will the gasoline tax significantly reduce....

air pollution?

global warming?

traffic congestion?

traffic accidents?
Conflicting answers to this question within the
literature
Unintended Consequences



Gasoline tax provides incentives for consumers to
use less gasoline, NOT necessarily to drive less
Most of the literature agrees that, over time,
consumers will migrate to more fuel-efficient
vehicles and driving habits will remain unchanged
Since most of the externalities are distance-related,
gasoline tax is not ideal for reducing them. Permile taxes, such as VMT or PAYD, might be better
suited for this.
Political Considerations
Concept of “expected support”
1. An individual's support for government based on
benefits he/she receives from public goods vis-a-vis
loss of income from taxation
2. The likelihood that an individual will cast favorable
vote in the next election
3. Individual's relative political influence
Government seeks to maximize expected support for
a policy while minimizing political opposition to that
policy
Political Considerations
Empirical evidence for this type of government
behavior:


Authors Goel and Nelson discovered an
association between Congress' decision to raise
gasoline tax in 1983 and the low price of gasoline
Policymakers raise taxes as prices fall in an attempt
to minimize the political costs of their decision (Goel
and Nelson, 1999).
Political Considerations




Raising taxes is politically unpopular, because it
places the burden on consumers
Restricting emissions standards for new vehicles
(CAFE) is more acceptable, because the burden is
on producers
However, powerful automobile industries may skew
expected support in their favor
Additionally, per-mile alternatives like VMT and
PAYD are even more politically unpopular due to
ethical and privacy concerns.
Conclusions
Does raising the gasoline tax fulfill the policy
goals?


Effectiveness: reduces consumption (Hsing, 1994),
but only in the short-run as consumers migrate to
more fuel-efficient vehicles (Kayser, 2000)
Efficiency: unclear if policy maximizes benefits and
minimizes costs. There may be distortion caused
by income tax (West and Williams, 2005) and high
distributional costs (Bento et al, 2005).
Conclusions
Does raising the gasoline tax fulfill policy
goals?

Externalities: if raising the gasoline tax reduces
consumption, it will also affect the externalities
mentioned earlier. It would reduce them more than
the CAFE standards policy, but not as much as permile policies that reduce driving.
Conclusions
Does raising the gasoline tax fulfill policy
goals?

Political Acceptability: The gasoline tax is already in
place, so raising it would be relatively easy.
However, there are high political costs associated
with tax hikes. A policy that places the burden on
producers (such as CAFE standards) may be
preferred by policymakers.
Questions?