Incidence of Changes in Gasoline Taxes

I used to live in Alaska, where questions of energy policy were quite important.

Economic analysis of the incidence of taxes is often considered in the context of the time frame. The short term incidence of a change in a tax is going to be different from the longer term incidence.

In most simple partial equilibrium models, the incidence of changes in taxes depend upon the relative elasticities of supply and demand. The least elastic factor is impacted the most.

Although estimates vary, the short term elasticity of demand for gasoline is probably around -.2, meaning a 10 percent increase in the price would lead to a 2 percent decrease in consumption. Demand for gasoline is relatively "inelastic," in the short run.

What is the short term price elasticity of supply of gasoline? In the short run, prices are driven by global crude oil prices, and the USA is pretty much a price taker in the global market. For US gasoline consumers, the elasticity of supply is pretty high, at least within the range relevant for small short term changes in US consumption of gasoline. (For larger changes in demand, and for longer time periods, things will be different).

In the short run, most of a reduction in excise and sales taxes on gasoline will led to reductions in the prices consumers pay at the pump. (Think of the short term impact of an increase in sales taxes.).

If the gasoline tax revenues are replaced by an excess profits tax on oil companies, it will be a progressive change, shifting the incidence of the tax from consumers to shareholders of oil companies, including foreign share owners.

Some economists will be troubled by the Clinton proposal because it would increase consumption of gasoline at a time when policy interventions normally would seek to decrease consumption. But when addressing short term shocks to the economy, something like this can make sense. Consumers of gasoline include people who have to commute to work, and who can't easier replace poor mileage vehicles. As a short term measure, it is a respectable and progressive effort to protect consumers who have few options.

In the longer run, taxes on gasoline should be higher, not lower, to discourage consumption. But in the face of a rapid increase in the global price of crude oil, the short term proposal by Senator Clinton would be a reasonable and effective intervention.

Comments

[KillTheMessenger]

OK... let's throw a little bit of brain at this problem, shall we.

How can a person cut their gasoline bill in half or less in an instant? By buying a hybrid, of course. The car costs $22,000. 15,000 miles a year driven, 47mpg fuel economy under real world conditions (that's what ours can do), so we need 320 gallons of gas a year. That's around 400 gallons less than the average car in the US. So at $4/gallon we save $1600 annually. That's a 7.2% return on investment. More than the financing cost of the car. Now, if the government gave a $6000 tax refund for every car over 40mpg, we would be out of the hole in not time.

So let's see how many cars we can fund with an additional $1 gas tax annually? US gasoline consumption is about 380 million gallons a day. $380million/$6000=63000 cars a day or 23 million cars a year. Oh, my. We don't even make that many hybrids a year! And all that with a $1 gas tax which is 25% of what the Europeans pay.

A little bit to think about.

[richardmcnoggin]

L'ooks good on paper but what should you do with the trade in? You are UPSIDE DOWN and still owe money on your trade in. Then what? The Illegal Mexican family who cant afford the Honda Prissyus will gladly take your trade in but you still need to pay it off.. Then you havent really solved the problem anyway have you?

[bgregs]

Senator Clinton and Senator McBush have proposed to remove the federal 18.4 cent gasoline tax. The only difference between their two plans is that Hillary has decided to attempt to replaced the billions of dollars which will be lost if this plan occurs. However, they BOTH disregard the likelihood that the oil companies will simply keep the 18.4 cents while claiming that it's simply an increased price!

[jvarga]

1) How does Senator Clinton's plan ensure gas prices will drop 18.4 cents per gallon?

2) At the diesel fuel price hearings today (I was listening at work) one of the oil guys said "any tax on us hurts our investors" and upon further questioning suggested that increase in their tax would be passed along to consumers.

Major premise: He's being honest with the second comment.
Minor premise: Senator Clinton's plan is to remove the federal tax (which isn't the same as lowering the price of gas) and place a new tax on the oil companies to make up the lost funds

Conclusion: This will accomplish nothing for the consumers since the oil companies would raise prices to offset the income lost through the new tax? This would be further problematic when the "tax holiday" ends and the 18.4 cents per gallon is readded? Complicating this of course is the fact that removal of the tax doesn't actually mean gas will drop by 18.4 cents per gallon?

[Rule Of Law]

Gasoline/Oil should be Nationalized with all profits going to the exploration of alternative energy. We could then hire the back folks who run those companies now on a consultancy basis, with set wages, and a nice G-12 level pension program!