Gasoline Taxes and Consumer Behavior

Abstract

Gasoline taxes can be employed to correct externalities associated with automobile use, to reduce dependency on foreign oil, and to raise government revenue. Our understanding of the optimal gasoline tax and the efficacy of existing taxes is largely based on empirical analysis of consumer responses to gasoline price changes. In this paper, we directly examine how gasoline taxes affect gasoline consumption as distinct from tax-inclusive retail gasoline prices.Consumers respond more strongly to gasoline tax changes; a 5-cent tax increase would reduce gasoline consumption by 0.86 percent, compared with 0.29 percent from an equivalent change in tax-inclusive gasoline prices. This difference suggests that traditional analysis could significantly underestimate policy impacts of taxes. We further investigate the differential effect from gasoline taxes and gasoline prices on both the intensive and extensive margins of gasoline consumption. We discuss two potential reasons for our main findings as well as their implications for the estimation of the implicit discount rate for vehicle purchases and for the fiscal benefits of raising taxes.

Keywords: Automobile, Consumer Response, Gasoline Tax

JEL Classification: Q4, Q5, H3