Distributional and Efficiency Impacts of Gasoline Taxes: An Econometrically Based Multi-Market Study

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Distributional and EfficiencyImpacts of Gasoline
TaxesAn Econometrically BasedMulti-Market Study

• Julia Michaels
• Oral Presentation 1
• Econ 539 Public Policy Analysis

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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

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Research Question

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

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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

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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

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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
• Utj Vj (y/T-rj, uj, qj, z, ?) ?ij
• yhousehold 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

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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.

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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

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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
• Tax-based revenues recycled to households in
  proportion to gasoline tax payments
• Income-based revenues are recycled in
  proportion to their benchmark income

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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)

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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

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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.