1. Distributional and Efficiency Impacts of Gasoline Taxes: An Econometrically Based Multi-Market Study Julia Michaels Oral Presentation #1 Econ 539: Public Policy Analysis

2. Article Citation Bento, Antonio M., Lawrence H. Goulder, Emeric Henry, Mark R. Jacobsen & Roger H. von Haefen. 2005. “Distributional and Efficiency Impacts of Gasoline Taxes: An Econometrically Based Multi-Market Study.” American Economic Review, (95)2: 282-287. Accessed through J-Stor. *Cited using the style of the American Economic Review

3. Research Question Several proposed strategies to discourage gasoline consumption: 1) Heighten corporate average fuel economy (CAFE) standards, 2) Subsidize the retirement of older vehicles, OR 3) Increase the federal gasoline tax What would be the effects of a gasoline tax increase on efficiency and distribution?

4. What Might We Expect? If we raise the gasoline tax.... People might try to reduce their gasoline expenditures by driving less Sales of fuel-inefficient cars might decrease Sales of fuel-efficient cars might increase Low-income households, or households with children, might suffer disproportionately vis-a-vis wealthier households

5. Methods... Authors use “an econometrically based multi- market simulation model” (p. 282) Examines impacts of the policy on both the aggregate level and across households Although the gasoline tax affects demand, it also affects vehicle choice; this estimation approach takes into account both effects. Examined the estimated effects of a $0.10, $0.30, and $0.50 tax increase

6. Conditional Utility Function Assuming that households are rational and choose to maximize utility, household automobile choices arise from decisions made on T-seperable choice occasions, where T depends on # of adults in household: U tj = V j (y/T-r j, u j, q j, z, ) + ij y=household income rj, uj, and qj = automobile j's 1-yr rental price, operating cost per mile, and non-price characteristics (respectively) z = a vector for household characteristics = parameter vector that varies randomly ij = error term

7. Additional Considerations Because there are so many different types of cars, the authors divided them into 5 age categories, 10 car classes, and 7 manufacturer (make) categories, for a total of 350 possible age-class-manufacturer combinations.

8. Data Source 2001 National Household Travel Survey (NHTS) “The most recent and comprehensive survey of US automobile demand” (p. 284) Also contains a cross-section of vehicle miles traveled (VMT) and various economic, demographic, and geographic data

9. Results... The regressive nature of the gasoline tax is dependent on the manner in which the tax revenues are recycled (returned) to the economy. Two types of revenue-recycling: 1. Tax-based = revenues recycled to households in proportion to gasoline tax payments 2. Income-based = revenues are recycled in proportion to their benchmark income

10. Efficiency Effects Gross efficiency costs are about $12, $38, and $68 respectively (for increases of 10, 30 and 50 cents) However, this does not take into account environmental benefits or other important externalities resulting from the policy change “The gas-tax increase induces a reduction in fleet size (increase in scrappage), a decline in quantity demanded of new cars relative to used cars, and a relative increase in quantity demanded of more fuel-efficient cars” (p. 286)

11. Distribution Effects Welfare Impact (EV) as a percentage of benchmark income Under tax-based recycling, the gas-tax increase has a proportional effect; the EV for wealthy households is the same as for poorer households. However, costs are slightly higher for households that have children, as they tend to do more driving Under income-based recycling, EV is regressive: costs are lower for high-income households and higher for low-income households

12. Policy Implications “Because of its potential to improve the environment and enhance national security, reducing automobile-related gasoline consumption has become a major US public policy issue” (p. 282) This simulation helps us understand the effects of a potential solution (gas-tax increase) under two revenue recycling situations The simulation shows that the policy would be fair under tax-based recycling, but regressive under income-based recycling.