Impacts of Rising Gasoline Prices: The Public Finance Issue

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Impacts of Rising Gasoline Prices The Public
Finance Issue

• Presented by Charles E. Olson
• Visiting Associate Professor
• Robert H. Smith School of Business
• University of Maryland

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Rising gasoline prices have produced a number of
effects including the following

• Reduced gasoline usage
• Scrapping of inefficient vehicles
• Greater transit usage
• More airline travel
• More carpooling
• Less air pollution
• Less shopping and eating out
• Reallocation of household and business budgets
• Reduced user fees for Federal and state
  governments, including D.C., Maryland and
  Virginia

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• Reduced user fees create significant distress for
  state and local government because numerous
  budgets depend on this source of revenue.
• The problem is caused by the gasoline/diesel tax
  structure which is a flat tax per gallon of fuel
  purchased. In Maryland, for example, the tax is
  23.5 cents per gallon. In combination with the
  Federal tax, the total is 41.5 cents per gallon.
• Tax revenues dont keep up with the price level
• Reduced usage lowers revenues
• Lower revenues may reduce highway maintenance and
  construction

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Proposed Solutions

• Reduce Speed Limits
• Tax Holiday (Albert Wynn)
• Other Taxes (Martin Wachs)
• Toll Roads
• Stricter Mileage Requirements
• Price Regulation (Hawaii)

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Olson Regional Plan

• D.C., Maryland and Virginia act to increase
  gasoline and diesel taxes by 15 cents per gallon
  in 2006, followed by 2 cent increases from 2007
  to 2011. After 2011, tax rises by the CPI plus 1
  percent per year.

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Olson Regional Plan

• Disadvantages
• Higher fuel prices
• Some sales leakage to border states
• Greater impact on lower income families

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Olson Regional Plan

• Advantages
• Higher pump price is efficient and easy to
  collect.
• Area requires transportation infrastructure
  improvements and maintenance. In Maryland, for
  example, the Connector is an expensive project.
• Higher pump prices will speed conservation both
  in terms of short-term effects (transit, pooling,
  fewer trips) and long-term (vehicle conversion).
• Air pollution will be reduced with reduced usage,
  more efficient vehicles and better highway
  systems.
• The region will make the transition to more
  efficient transportation more quickly than other
  areas.
• A greater percentage of the gasoline/diesel
  revenue flow will remain in the U.S. and the
  region.

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Conclusions

• Transportation infrastructure is essential.
• The gasoline/diesel tax is an efficient way to
  collect revenue to finance regional highway and
  transit construction and maintenance.
• Government should act responsibly to keep up
  these collections in response to lower usage
  levels.

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• Questions?