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  Pollution  Global Warming Social Reasons  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-You- Drive (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. Per- mile 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 per- mile 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?