Understanding the Heterogeneous Effects of Gasoline Taxes Across Income and Location

Abstract

Using confidential household-level data, we estimate spatial and demographic variation in household-level gasoline price elasticities and gasoline tax burdens from a 60 cent federal gasoline tax increase. In order to address unobserved consumer heterogeneity, we employ a parametric adaptation of the maximum score methodology to model the household’s choice of vehicles and driving decisions, allowing for disaggregated vehicle choices, vehicle-specific fixed effects, and interactions among the multiple vehicles in each household. We estimate average price elasticities of demand for gasoline at -0.74, and find that rural and poor households bear the greater share of the tax burden. We suggest a policy that helps mitigate the tax burden inequalities across household location and income and retain government revenue.

Keywords: gasoline taxes, welfare, elasticity, rural, commuting, transportation

JEL Classification: Q0, R0, H0