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Gasoline taxes are an important policy tool for reducing reliance on oil imports, curbing externalities associated with car use, and increasing government revenues. Externalities associated with car use are local air pollution, CO2 emissions, traffic accidents, and traffic congestion (Andersson, 2019). Concerns about climate change, air pollution, national budget imbalances, and energy security have rekindled calls for higher state and federal fuel taxes (Erickson et al., 2018). The gasoline tax provides an administrative way to regulate gasoline consumption.
Besides addressing environmental externalities, fuel taxes can reduce fuel consumption and mitigate concerns about fluctuations in oil prices, foreign policy restrictions, and economic sensitivity to other military and geopolitical spending (Lazarus & van Asselt, 2018). In addition, federal and state petrol taxes are an important source of income for constructing and maintaining transportation infrastructure. To understand how fuel tax changes affect vehicle use and consumption, it is important to use this tool efficiently to achieve these policy objectives.
Consumers respond to gasoline tax increases like changes in gasoline prices, which usually results in a reduction of gasoline consumption. As a result, such consumer reaction could take place in the case of 0.5 cents gasoline federal tax increase. A 5-cent rise in the gasoline tax reduces gasoline use by 1.3 percent in the short run (Berry, 2019). According to recent economic literature, consumers are less responsive to rising gasoline costs, at least short-term (Pizer & Sexton, 2020). Combining these calculations with ongoing assumptions suggests that a significant increase in the gasoline tax would be required to significantly reduce fuel consumption (Mercure et al., 2018). Not only does this exacerbate the perceived political cost of raising the petrol tax, but it may explain why US policymakers prefer less stringent fuel economy standards than the petrol tax. Taxes will be cheaper to achieve your target fuel savings.
References
Andersson, J. J. (2019). Carbon taxes and CO 2 emissions: Sweden as a case study. American Economic Journal: Economic Policy, 11(4), 1-30. Web.
Berry, A. (2019). The distributional effects of a carbon tax and its impact on fuel poverty: A microsimulation study in the French context. Energy Policy, 124, 81-94. Web.
Erickson, P., Lazarus, M., & Piggot, G. (2018). Limiting fossil fuel production as the next big step in climate policy. Nature Climate Change, 8(12), 1037-1043. Web.
Lazarus, M., & van Asselt, H. (2018). Fossil fuel supply and climate policy: exploring the road less taken. Climatic Change, 150(1), 1-13. Web.
Mercure, J. F., Pollitt, H., Viñuales, J. E., Edwards, N. R., Holden, P. B., Chewpreecha, U., Salas, P., Soggnaes, I., Lam., A. & Knobloch, F. (2018). Macroeconomic impact of stranded fossil fuel assets. Nature Climate Change, 8(7), 588-593. Web.
Pizer, W. A., & Sexton, S. (2020). The distributional impacts of energy taxes. Review of Environmental Economics and Policy.
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