Distributional Implications ofMotor Fuel Taxes

One major argument against increasing taxes on gasoline is that such a tax is regressive: lower-income households spend a larger fraction of their budgets on gasoline than do wealthier households. Unlike with other energy goods, this doesn't hold throughout the entire income distribution—t he very poorest households are less likely to own cars—but it does hold for most of the income distribution.

As noted earlier, in section 3.3.3, studies based on one year's income tend to make taxes on consumer goods look more regressive than studies based on income over a longer time period (or proxies for longer-term income, such as expenditures). Poterba (1991) showed that this effect was important for analysis of the gas tax. West (2004) and West and Williams (2004) pointed out that lower-income households have more elastic gasoline demand than higher-income households, and that this lowers the burden they bear from a price increase, making the gas tax less regressive than if the elasticity were constant across incomes.

Nonetheless, even after taking those effects into account, the gas tax is still somewhat regressive. West and Williams (2004) find that the burden of a gas tax is highest for the second-lowest income quintile and lowest for the top quintile, though it is relatively flat across the bottom four quintiles: they estimate that raising the gas tax to the efficient rate (an increase of roughly $1/gallon) would impose a burden of 2.78% of annual expenditures for the bottom quintile, and 3.01%, 2.88%, 2.49%, and 1.60% for the second through fifth quintiles, respectively.

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