Road Pricing and Gasoline Taxes:The Issues

Road Pricing and Gasoline Taxes:The Issues

Marielle Vena

Economics 539

March 9, 2009

Marielle Vena

Economics 539

March 9, 2009

2

FocusFocus

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?

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?

3

The LiteratureThe 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

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

4

History and NecessityHistory 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

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

5

ShortfallShortfall

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 >> 817% increase in these costs from 1957 to 2002 (Wachs, 2003)

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 >> 817% increase in these costs from 1957 to 2002 (Wachs, 2003)

6

ConsequencesConsequences

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?

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?

7

The Optimal TaxThe 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

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

8

The Optimal Tax: EuropeThe 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 country’s tax revenue Funds not restricted to use for transportation projects

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 country’s tax revenue Funds not restricted to use for transportation projects

9

Fuel ConsumptionFuel 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

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

10

Fuel Consumption: Homeland SecurityFuel 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 country’s dependence on foreign suppliers

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 country’s dependence on foreign suppliers

11

Fuel Consumption: Emissions and the EnvironmentFuel 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

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

12

Fuel Consumption: Reverse CausalityFuel 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

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

13

Pollution TaxesPollution 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

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

14

AlternativesAlternatives

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)

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)

15

Distributional EffectsDistributional 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)

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)

16

Distributional EffectsDistributional 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)

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)

17

Literature AnalysisLiterature 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).

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).

18

Literature AnalysisLiterature 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).

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).

19

Literature AnalysisLiterature 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.

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.

20

Literature AnalysisLiterature 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).

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).

21

Literature AnalysisLiterature 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.

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.

22

ConclusionConclusion

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

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

23

Questions?Questions?