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Friday, April 23, 2010

The Role of Federal Gasoline Excise Taxes in Public Policy

Robert Pirog
Specialist in Energy Economics

American drivers, compared to those in other industrialized nations in Europe, pay relatively low federal, state, and local gasoline and diesel excise taxes. The federal taxes are used specifically to fund annual highway construction, maintenance, and mass transit. Over the years, proposals have come forth to raise the federal tax as a way to address long-standing national policy concerns, including U.S. dependence on imported oil and various environmental problems related to large volumes of gasoline consumption. 

Policy attention on the role of the gasoline tax has also increased recently due to three major developments. First, the 2008 oil and gasoline price run-up and subsequent economic downturn have led to a decline in gasoline tax revenues available for needed highway construction and maintenance. Second, the possibility of enacting some form of binding climate change legislation in the next several years will eventually mean an increase in the relative price of fossil fuels, including oil and gasoline. Third, the volatility of gasoline prices has affected investment planning (e.g. for alternative fuels) and arguably contributed to the troubles facing domestic automobile manufacturers. In the above context, this report outlines some of the macroeconomic and microeconomic pros and cons of using the federal gasoline excise tax for policy purposes in addition to the funding of highway infrastructure. 

Whether an increase in the gasoline tax was fixed or variable, advocates argue that increasing the relative price of gasoline would promote beneficial short- and long-term changes in how we use this form of energy. A higher relative price would encourage consumers and manufacturers to move toward more fuel-efficient vehicles, or to switch to alternative fuels, thus reducing oil consumption and imports, reducing air pollution, and possibly encouraging greater use of mass transit. Advocates further argue that such taxes could be recycled back into the economy through changes in the tax structure and/or increased investment in renewable or alternative fuels, among other options. 

Opponents of gasoline tax increases point to the effects on consumer and business spending, which affect the short- and long-term performance of the overall U.S. economy, especially in a time of needed economic recovery. Additionally, opponents point out that the gasoline tax has a regressive impact and affects rural areas disproportionately. Opponents also argue that such tax revenues could be better spent if left in the private sector. 

Gasoline price increases due to market forces, or earlier tax increases, of course, have been part of the economic environment for almost four decades. Since the mid-1970s, there have been significant spikes in gasoline prices due to world oil market turmoil attributed to political conflict and war in the Middle East and to financial market speculation. Depending on the specified purpose of a new gasoline tax increase, it could be modest, or more significant. Because the demand for gasoline is quite price insensitive (inelastic), significant revenues could be generated with little change in real consumption, even with a relatively low tax increase. A more substantial tax increase would likely be needed to change consumer preferences and business investment decisions. Any debate on modifying the gasoline excise tax will likely revolve around these tensions.

Date of Report: April 15, 2010
Number of Pages: 11
Order Number: R40808
Price: $29.95

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