Gas Tax Incidence

Rob Goodspeed points out that we have substantial evidence that consumers bear only around half the burden of gasoline taxes over the long run, with the rest of the incidence falling on the oil companies. Here's one study:

Using the estimated coefficients, we can determine the incidence of federal and state specific taxes. An increase in the federal tax by 1¢ raises the retail price by 0.47¢ and decreases the wholesale price by 0.56¢. Thus, consumers and wholesalers each pay roughly half of the federal specific tax.

In other words, we really should be raising the gas tax. There are a billion reasons this won't happen, but if we were to raise the gas tax, then rebate half the revenues to citizens on some kind of flat per person basis, and make the other half available to fund transit projects, there'd be no net burden on the population, you'd create an incentive to use alternative forms of transportation where they exist, and you'd have a pool of revenue available to create alternative forms of transportation.

Photo by Flickr user rnugraha used under a Creative Commons license

Comments

John Anderson was suggesting raising gas taxes in 1980. It was a good idea, but politically impossible. By now we would have benefited in a big way if we'd done it then.

Posted by jimBOB | May 2, 2008 12:27 PM

Don't oil companies get their income from their customers? And so isn't any cost that they absorb ultimately paid for by their consumers? This seems like a way to say that the customers pay the whole gas tax increase, but they only see half of it.

It makes sense to say that some oil companies will make up the difference by ditching dividends or reducing executive comp (or laying people off), but these measures can only go so far. Does the linked analysis discuss potential differing impacts from raising the gas tax by 1 cent vs. 3, 5 10, etc. cents?

Posted by mike | May 2, 2008 12:48 PM

Matthew, by the same logic, will you endorse repealing the corporate income tax?

Posted by Eli | May 2, 2008 1:03 PM

Don't oil companies get their income from their customers?

Of course, but the issue is how much income. If that was the only part of the equation, they could charge $20/gal and make tons of money. The problem is that at that price, demand would plummet as people figured out ways to do without.

Right now the oil companies are making money hand over fist, but Toyota is also selling every Prius they can produce. Different price points bring in competition and reduce use. The company's best path is to try to find a path that is as much as the market will bear without contracting the market.

Posted by LFC | May 2, 2008 1:08 PM

mike,

It is true that the wholesaler's share of the tax has to come from its margins (and therefore it would run out of its ability to pay its share of the tax without raising the retail price when it ran out of margin).

So, basically Matt's proposed tax scheme amounts to a wealth transfer from high gas consumers to low gas consumers to incentivize lower gas consumption plus a tax on oil company profits to pay for more transit projects. Which I think was his goal--but don't expect oil companies to be happy about all this.

Posted by DTM | May 2, 2008 1:13 PM

Unfortunately I can't access that report - it wants me to purchase the document. But without having seen it, a few things occur to me. If they raised gas taxes, it wouldn't just be me paying an extra cent at the pump. It'd be the truckers paying an extra penny at the pump, therefore charging more than an extra penny (to maintain their margin) to the grocery stores, who charge me more than the truckers' margin in order to maintain their own margin. It's a cascade on down the line. You'd have to make a rebate to all the shipping firms, as well as all the individuals, to make this really a "no net burden" increase. Otherwise it just slips in as a stealth tax, making goods more expensive than they need to be. Not saying this would, in itself, make it a bad idea. I'm just very leery of the idea that you can get something (benefit of people driving less plus more road funding) for nothing.

Posted by Tel | May 2, 2008 1:15 PM

Unfortunately I can't access that report - it wants me to purchase the document. But without having seen it, a few things occur to me. If they raised gas taxes, it wouldn't just be me paying an extra cent at the pump. It'd be the truckers paying an extra penny at the pump, therefore charging more than an extra penny (to maintain their margin) to the grocery stores, who charge me more than the truckers' margin in order to maintain their own margin. It's a cascade on down the line. You'd have to make a rebate to all the shipping firms, as well as all the individuals, to make this really a "no net burden" increase. Otherwise it just slips in as a stealth tax, making goods more expensive than they need to be. Not saying this would, in itself, make it a bad idea. I'm just very leery of the idea that you can get something (benefit of people driving less plus more road funding) for nothing.

Posted by Tel | May 2, 2008 1:16 PM

Tel,

I don't think that is right. You are assuming the supply chain adds to the ultimate incidence of the tax for consumers at the other end of the supply chain, but the likely effect is the opposite: the supply chain will absorb some of the incidence of the tax through slightly reduced margins along the way.

And even if the consumers absorbed the entire incidence of the tax, they should still be compensated as a whole insofar as the revenues are distributed to them per capita (meaning they are also getting back their per capita share of the tax the shippers paid). So all this does is slightly complicate Matt's incentive story, with it now benefiting consumers to reduce not only their direct consumption of gas, but also their indirect consumption of gas through these supply chains.

By the way, there would be a cost to all this, namely the cost of administering the scheme (collecting the tax and then distributing the revenues). So it is not quite a free lunch.

Posted by DTM | May 2, 2008 1:26 PM

So in other words, Hillary's proposal to have a temporary gas tax moratorium and replace the revenues with a tax on oil company profits would be effective at transferring some money from oil companies to consumers. Just checking.

Posted by mq | May 2, 2008 1:27 PM

This is covered pretty thoroughly in Econ 101. I had it in high school. The burden of the tax falls on both producers and consumers, depending on the elasticity of demand.

Simple stuff, as a little 17 year old i remember making my graphs of it. I wonder when presidential candidates will reach that level of economic understanding.

Posted by skyler | May 2, 2008 1:31 PM

AAARRRRGGHHHH!!!!!

Everybody please STFU with the wonky gas tax analysis and focus on civics. Sen. Clinton has NEVER introduced a bill to eliminate the gas tax this summer and tax oil companies to pay for it. No such bill exists. It's a line in a stump speech and a pander in a TV ad.

Sen. McCain introduced his gas tax holiday bill, S. 2820.

Sen. Clinton has TV ads saying "Talk is cheap" and is saying in her stump speech "I have advocated for a federal gas-tax holiday paid for by imposing an excess profits tax on the oil companies. Let the oil companies pay the federal gas tax for the next months!". Well who the hell is she advocating to to get this done? Congress? SHE'S IN CONGRESS.

Sen. Clinton's plan to reduce the gas tax is vaporware. It's the new Guns N' Roses album. It's the 4th Lord of the Rings movie. It's the good Michael Bolton album. In other words IT DOESN'T FREAKING EXIST. THERE IS NO BILL BEFORE CONGRESS.

All the economists analyzing plans and talking about demand curves should check freaking Thomas and GovTrack. THERE IS NO CLINTON BILL.

She's proposing relief "this summer" but hasn't introduced a bill for debate!

It upsets me.

Posted by joejoejoe | May 2, 2008 1:36 PM

This argument is wrong because the underlying paper (if you trace it back) is from 2003, and thus must be based on pre-2003 data. This is before the big run up in oil prices, and while there was still spare capacity in the oil production system. At this point, there is basically no deployable spare capacity anywhere (arguably, Saudi Arabia has some spare capacity, but if so they are saving it for a truly rainy day) and global oil production has been basically flat for the last three years (since about 2005). If taxes are reduced, it is not going to induce Saudi Arabia to pump more oil, it won't change the shape of the final demand curve, and therefore the demand curve will meet the same fixed supply at the same price point. The only difference is that oil producers will get the money instead of the US government.

Posted by Stuart Staniford | May 2, 2008 1:40 PM

Gas! I swear this product is going to be the end of mankind. THe middle east is a lost cause because they always have an excuse to not help the oil situation. There are people who are billionares because they own a certian amount of oil or they own land that holds oil. I wish people in the US and Worldwide would stop being selfish pricks and realize if they don't help the oil situation later on down the road they will also be royaly screwed just like the citizens are now. Religion should also not be the decider whether or not oil should be shared.I know someone is going to be offended due to what I am saying, but people in the middle east put one pants leg on at a time just like everyone else does. Locally and internationally oil should be thought through, and our gov't along with the middle east should step back and look down the road because oil will not be around forever and neither will man.

Posted by Zach Alexander | May 2, 2008 1:50 PM

mq,

Maybe, but it could also be the case that due to current market conditions and the timing of the proposed holiday, the oil companies would capture an even larger share of the tax holiday. Moreover, any short-term price benefit to the consumers could be wiped out by long-term price harms (e.g., another paper found that while gas prices decreased during a gas tax holiday, they then increased after the gas tax holiday period was over).

So the much more certain and efficient way to effect such a wealth transfer would be to tax the oil companies and then just distribute the revenues directly to consumers, as opposed to trying to get those revenues to consumers through the mechanism of a gas tax holiday.

Posted by DTM | May 2, 2008 1:58 PM

"Simple stuff, as a little 17 year old i remember making my graphs of it. I wonder when presidential candidates will reach that level of economic understanding."

Wouldn't matter if they all reached that level. They care only about winning elections, and our electorate is a con man's dream. Churchill must have had Americans in mind when he said the best argument against democracy is a five minute conversation with the average voter.

Posted by kafka | May 2, 2008 2:10 PM

Well a couple of years ago (when gas was $60 a barrel), Robert H. Frank noted one of President Carter's proposals, a revenue neutral gas tax. Increase the gas tax by $2.00 a gallon and use the money raised to cut the payroll tax.
http://www.nytimes.com/2006/02/16/business/16scene.html

Posted by beowulf | May 2, 2008 2:15 PM

joejoejoe,

Kudos to the GNR reference.

Posted by freddiemac | May 2, 2008 4:07 PM

Aren't the owners of oil companies part of the population, too? This argument boils down simply to "Oil consumers are people and oil producers are not." How exactly is this any different from all the types of bigotry that aren't considered acceptable? My little, sweet old grandmother in law who passed away basically had one asset - stock in Occidental Petroleum from when her husband worked in the oil fields. I had the silly idea at the time that she was a person, worthy of our concern in terms of rights and fairness. When her stock was languishing for 20 years when oil was cheap, how many research projects were calling for tax rebate to her?

Posted by kebko | May 2, 2008 4:49 PM

If you were concerned about her rights and fairness, you should have urged her to sell most of her stock and diversify with a conservative mutual fund.

An elderly widow with her life savings in a single stock-- dude, that's just wrong!

Posted by beowulf | May 2, 2008 6:19 PM

What about deadweight loss?

Posted by Greg N | May 2, 2008 7:24 PM

Personally, I don't feel at all punitive about oil producers. They just happen to be in a business with high negative externalities, so if consumers start seeing more of those externalities reflected in the price of gasoline, then the oil business is going to suffer. And I favor that happening, but not because I dislike oil producers. Rather, I just dislike the negative externalities, which is a sufficient reason to want consumers to shift to alternatives.

Posted by DTM | May 2, 2008 10:52 PM

Who are the wholesalers? They aren't part of the population?

Posted by aaron | May 3, 2008 11:15 AM

There is a very simple fix to the issue:

1. Exempt the first $13,000 of income from employee payroll tax contributions (you can also look at it as a $1,000 payroll tax credit)

2. Slap an additional $1 per gallon tax on gasoline; with 130 - 140 million payroll workers and 130 - 140 billion gallons of gas consumed every year, it's a wash

3. If gas consumption drops, the gas tax will rise accordingly the next year to make up for the shortfall

4. Fuel efficiency standards will rise dramatically without the need for draconian CAFE standards, and reduced demand may even push prices below current levels, pre-tax

5. The tax will have four positive effects: (1) provide a massive tax break to the 90% of Americans who drive less than 20,000 miles per year, (2) reduce carbon emissions, (3) discourage costly urban sprawl, and (4) reduce the current account defecit via lower oil imports

This is precisely the "soft paternalist" approach that Obama and Goolsbee should follow. In fact, they could use this approach to lock their wing of the democratic party into power for a generation: eliminate ALL employee payroll tax contributions (about $450 billion a year) and implement a $75 per ton of CO2 carbon tax (6 billion tons of CO2 a year). That qould equate to a $0.65/gallon carbon tax that would be a massive boom to labor productivity and end the climate debate.

Posted by Nick Bradley | May 5, 2008 12:30 PM

I'm not sure I beleive that demand for gasoline has doubled since July 2005. If I remember correctly I was paying about $1.86 per gallon of gas here in "The Choclate City" (New Orleans). We are paying almost that almost 3 years later here in "The Choclate City" now. Doesn't "your" President Bush have very close ties to the oil industry? Has anyone checked his Swiss bank account lately?
We turned the lights off at Xmas several years ago and it worked, why don't we not drive, excluding necessary truck transportation, for 1 day each month, say the 1st Sunday of the month. Then we will have too much supply. What's the oil company excuses going to be then?
Personally, I don't think Osama Bin Laden is the real terrorist in the USA, try Shell/Exxon/ Mobil/BP/Chevron etc.
Afterall, I 'm with Clinton, let them pay back some of what we have given them. We gotta start somewhere. I would rather save something than nothing. Agfterall, Bush is simply giving us money to give to the oil companies any way!

Posted by a good start | May 7, 2008 8:52 PM

I'm not sure I beleive that demand for gasoline has doubled since July 2005. If I remember correctly I was paying about $1.86 per gallon of gas here in "The Choclate City" (New Orleans). We are paying almost that almost 3 years later here in "The Choclate City" now. Doesn't "your" President Bush have very close ties to the oil industry? Has anyone checked his Swiss bank account lately?
We turned the lights off at Xmas several years ago and it worked, why don't we not drive, excluding necessary truck transportation, for 1 day each month, say the 1st Sunday of the month. Then we will have too much supply. What's the oil company excuses going to be then?
Personally, I don't think Osama Bin Laden is the real terrorist in the USA, try Shell/Exxon/ Mobil/BP/Chevron etc.
Afterall, I 'm with Clinton, let them pay back some of what we have given them. We gotta start somewhere. I would rather save something than nothing. Agfterall, Bush is simply giving us money to give to the oil companies any way!

Posted by a good start | May 7, 2008 8:53 PM