Road Pricing and Gasoline Taxes: The Issues

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Road Pricing and Gasoline TaxesThe Issues

• Marielle Vena
• Economics 539
• March 9, 2009

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Focus

• What are the issues at the center of the academic
  research on gasoline taxes?
• Why are they needed?
• Why do they need to be increased?
• Are there alternatives that could achieve the
  same outcomes?
• What are the distributional effects of these
  policies?

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The Literature

• 23 articles published in journals such as
• American Economic Review
• Transportation Quarterly
• National Tax Journal
• Journal of Policy Analysis Management
• Journal of Environmental Economics Management
• Applied Economics Letters
• Journal of Transport Economics Policy
• IEEE Systems Journal
• Ecological Economics
• 4 pieces from the popular press
• Provide general information and are not given the
  same consideration as the academic literature
  presented

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History and Necessity

• The first gas tax was implemented in the U.S. by
  the federal government in 1932
• Designed to function as a road user fee that
  charges motorists for the damage they cause to
  the roads
• Primary source of funding for U.S transportation
  projects

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Shortfall

• The revenues from gasoline taxes no longer cover
  the expenditures needed to maintain and construct
  the roads
• Inflation
• Real value of CA state gas tax in 1996 is the
  same level as it was in the 1920s (Ang-Olson,
  Wachs, and Taylor, 2000)
• Vehicle Fleet becoming more fuel efficient
• Cause the same damage to the roads, but
  contribute less fuel tax (Porter and Kim, 2008)
• Rising costs of transportation facilities
  materials
• Engineering Newsrecord Construction Cost Index,
  which tracks the prices of various material
  inputs in several cities over time gtgt 817
  increase in these costs from 1957 to 2002 (Wachs,
  2003)

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Consequences

• Expect the deficit of the Highway Trust Fund to
  increase and become unsustainable
• Growing trend of borrowing to cover the costs of
  transportation
• Increased 18 from 1995 to 1999 (Wachs, 2003)
• 1998 survey of 40 economists reveals unanimous
  support for a 25 cent increase in the gas tax
  (Wachs, 2003)
• What is the optimal level of taxation?

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The Optimal Tax

• Goals are efficiency and equity
• Equity is addressed in the discussion of
  distributional effects
• An efficient user fee would charge motorists a
  tax exactly proportional to the cost of the
  damage done to the roads
• Highway user fees are about 20 below
  highway-related expenditures, for all levels of
  government and all vehicle classes in the US in
  2000, according the the 1997 Highway Cost
  Allocation Study (Delucchi, 2007)
• Recommends increase of 20-70 cents per gallon
• This is prohibitively large, considering the
  average current combined state and federal tax is
  around 38 cents

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The Optimal Tax Europe

• Optimal level of U.S. tax is more than double the
  current rate, while the UK optimal is exceeded by
  half (Parry and Small, 2005)
• US gas tax is among the lowest of all industrial
  countries
• European taxes per gallon average 20 times US
  federal rates (Chouinard and Perloff, 2004)
• Generate a larger share of the countrys tax
  revenue
• Funds not restricted to use for transportation
  projects

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Fuel Consumption

• Microeconomic theory suggests that increasing gas
  prices, such as with a tax levied on consumers,
  will result in a decrease in the quantity of fuel
  purchased and consumed (Austin and Dinan, 2005)
• Public consensus favors reducing fuel consumption
  for a variety of reasons

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Fuel Consumption Homeland Security

• Hsing (1994), Parry (2005), and Hsu, Walters, and
  Purgas (2008) convey the potential homeland
  security benefits that may be achieved from
  reducing gasoline consumption by diminishing the
  countrys dependence on foreign suppliers

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Fuel Consumption Emissions and the Environment

• The environmental benefits of reducing fuel
  consumption through a gasoline tax are addressed
  by Walls and Hanson (1999), Sipes and Mendelsohn
  (2001), Khazzoom (1991), and Yohe (2007).
• Amount of pollution from vehicle emissions is a
  function of fuel usage
• Despite the introduction of more fuel efficient
  vehicles, emissions continue to rise because of
• Preferences for larger engine size
• More vehicles on the roads each year
• Vehicles are driving more miles

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Fuel Consumption Reverse Causality

• One of the most important conclusions from
  Hammar, Lofgren, and Sterner (2004) is their
  evidence to suggest some reverse causality in the
  relationship between gasoline taxes and
  consumption
• not only do low taxes and thus low (gas) prices
  encourage high consumption, but high levels of
  consumption also lead to considerable pressure
  against raising the taxes

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Pollution Taxes

• Research suggests some potential for gasoline
  taxes to reduce vehicle emissions could also be
  achieved through pollution taxes
• Often seen as one of the most cost-effective
  means of reducing pollution.
• Widely opposed by individuals and governments
  (Hsu, Walters, and Purgas, 2008)
• Fullerton and West (2002) examine the potential
  for adjusting the gasoline tax to create the
  market incentives of a pollution tax, looking at
  both homogeneous consumers and heterogeneous
  consumers, which allows them to account for
  preferences regarding engine size and miles

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Alternatives

• Address funding and/or environmental concers
• Indexed Gasoline Taxes (Ang-Olson, Wachs, and
  Taylor, 2000)
• Grams-per-mile Gasoline Taxes (vs.
  grams-per-gallon) (Khazzoom, 1991)
• Vehicle Miles Travelled Taxes (Porter and Kim,
  2008, and West, 2004)
• CAFE standards (Austin and Dinan, 2005, and West
  and Williams, 2005)
• Pay-As-You-Drive Insurance (Parry, 2005)

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Distributional Effects

• Bento et al. (2005) and West and Williams (2004)
  consider the distributional effects of different
  aspects of gasoline taxes.
• Poorer HHs tend to drive fewer miles, but fuel
  purchases make up a larger portion of their
  income
• Focuses on how the effects differ depending on
  how the revenues are recycled back into the
  system
• using the additional gasoline tax revenue to fund
  lump-sum transfers actually makes the policy
  progressive (West and Williams, 2004)

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Distributional Effects

• West (2005), West (2004) and Walls and Hanson
  (1999) reflect on the distributional effects of
  emissions taxes.
• Poorer HHs tend to drive older, dirtier vehicles
• VMT taxes are the least regressive option, and
  for some income groups are actually progressive
  (West, 2004)

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Literature Analysis

• Trends observed that speak to the credibility of
  the academic literature and contributed to the
  selection of these articles over other potential
  choices
• methods used and data sources of the research in
  these articles is explained in enough detail to
  make their results replicable by other
  researchers with similar knowledge and expertise,
  as with Bento et al. (2005) and Walls and Hanson
  (1999). Sipes and Mendelsohn (2001), include
  appendices to their article detailing their
  survey methods (307).

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Literature Analysis

• Not all of these articles present literature from
  other viewpoints, such as Wachs (2003)
• The authors of each article do provide some
  degree of theoretical justification for their
  decisions, such as Austin and Dinan (2005)
• Specifically address how a model or functional
  form is chosen, as in Fullerton and West (2002)
• Explain how the work in question fills any gaps
  or provides additional contributions to the study
  of the subject, as exhibited by Delucchi (2007).
  

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Literature Analysis

• Include different specifications, like Hsing
  (1994), to discover to what extent the choice of
  models impacts the results.
• West and Williams (2005), explain what steps have
  been taken to ensure that any necessary
  adjustments have been made such that the results
  generated are robust.

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Literature Analysis

• Parry and Small (2005), acknowledge the potential
  limitations of their study, as do many of the
  other articles
• They address how results might be interpreted, as
  in Hsu, Walters, and Purgas (2008) discussion of
  the metric effect
• Include sections detailing the rationale for and
  effects of certain assumptions, as in Parry
  (2005).
• Make suggestions regarding how future research
  can be improved or made more complete, as
  demonstrated by Porter and Kim (2008) and Kulash
  (2001).

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Literature Analysis

• Overall, the academic literature presented in my
  paper can be deemed credible not only by the
  virtue of its publication, but because each
  article was screened to meet the above selection
  criteria and represent the richest and most
  reliable information available on the subject of
  gasoline taxes.

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Conclusion

• Gravity of the funding crisis suggests the need
  for further research and analysis
• OR VMT tax experiment especially promising in
  terms of its efficiency and equity benefits, but
  faces obstacles
• Public Opinion
• Large-scale distribution of new RFID technology

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Questions?