ECONOMIC DEVELOPMENT; ENERGY CONSERVATION; GASOLINE TAX;

ENERGY CONSERVATION;

You asked whether any states have raised their gasoline taxes specifically to reduce consumption. You also requested a discussion of the economic impacts of this option.

SUMMARY

We have found no instances in which states have raised gasoline taxes specifically to reduce consumption. However, Connecticut and other states have used part of the revenues resulting from a tax increase to support public transportation, which can reduce consumption.

The economic literature indicates that a tax increase would decrease consumption only modestly in the short run, but more in the longer run. The effect of a tax increase on consumption in a small state such as Connecticut would be reduced to the extent that it induced drivers to buy their gasoline out of state. An increase would have a somewhat greater effect on moderate income and rural residents than other residents. The effect of the increase on the state’s overall economy would depend in part on how the state spent the revenues.

STATE ACTIONS

We have found no instances in which states have raised gasoline taxes specifically to reduce gasoline consumption. However, a number of states, including Connecticut, have increased gasoline taxes to provide additional funding for public transportation (mass transit and carpooling) projects and operating support. In Connecticut, support for public transportation operations account for 15. 4% of the expenditures of the Special Transportation Fund, which receives much of its funding from the gasoline tax. Several states statutorily require that part of gasoline tax revenues be used for public transportation. For example, Massachusetts requires that 15% of the gasoline tax be allocated to the General Fund for public transportation capital costs and other public transportation costs (Mass. Gen Laws. 64A Sec. 13). In addition California allocates approximately $ 7. 2 million per year of its tax to support bicycle commuting. A Federal Highway Administration Website, http: //www. fhwa. dot. gov/ohim/hwytaxes/2001/tab6_toc. htm, describes how each of the states allocates its gasoline and other motor fuels taxes.

ECONOMIC IMPACTS

A 2002 study by the Congressional Budget Office (CBO) compares how gasoline consumption is impacted by an increase in the federal gasoline tax, tightened vehicle fuel economy standards, and a regulatory system that limits emissions of carbon dioxide (a major contributor to global climate change). The study found that an increase in the gasoline tax would not ensure a specific decline in gasoline use. Estimating the gasoline savings that would result from a particular tax increase would require estimating changes in fleet-wide fuel economy (which depend on changes in consumer demand) as well as changes in the number of vehicle miles traveled. Both of these variables are affected by a wide range of other factors.

One key element of such estimates is the price elasticity of gasoline, i. e. , the expected change in gasoline consumption for a given price increase, other factors being held constant. Empirical estimates of price elasticities for gasoline vary greatly, in part because they are sensitive to the method used to estimate them. CBO cited a literature review that analyzed 97 price-elasticity estimates for gasoline. It defined 18 different categories of models and estimated the average short-run and long run price elasticity for the types of models most appropriate for measuring those elasticities. The authors found an average –0. 26 short-run elasticity and an average long-run elasticity of -0. 86. This suggests that a 15-cent increase in the tax on a $ 1. 50 gallon of gasoline would cause a 2. 6% decrease in the amount of gasoline used by passenger vehicles in the short run and an 8. 6% decrease in the long run. CBO notes that despite the uncertainty of the consumption effect of a gasoline tax

increase, the tax could be adjusted over time to meet a specific reduction target. The study is available at CBO’s Website, http: //www. cbo. gov/showdoc. cfm?index=3991&sequence=0&from=0#anchor.

The CBO study looked at the impact of an increase in the federal gasoline tax. Estimating the effect of an increase in state taxes, particularly in a small state such as Connecticut, is complicated by the phenomenon of leakage. If Connecticut were to raise its gasoline tax while neighboring states kept their taxes constant, part of the purchases now made in Connecticut would take place elsewhere. The amount of leakage would depend on the size of the increase and the pace at which it was introduced. For example, a one-time 15-cent increase in the gasoline tax would have a greater impact on drivers’ decisions as to where to buy gasoline than the same increase spread over three years. The Office of Fiscal Analysis has been unable to identify a model that would reliably predict the consumption effect of a gasoline tax increase in the state.

Another factor affecting the consumption effect of a gasoline tax increase is the use of the resulting revenues. For example, under current law, the increased revenues would go to the Special Transportation Fund, which is primarily used for highway purposes. To the extent that the tax increased the capacity of highways or decreased congestion and thus encouraged people to drive more frequently, any decrease in consumption could be partially offset by an increase in vehicle miles traveled, which would increase gasoline consumption. On the other hand, if the added revenues were used to fund public transportation, it could further reduce consumption.

In addition to the consumption effect, the legislature might wish to consider the distributional effects of a gasoline tax increase. While the CBO study notes that gasoline’s share of family spending is similar across income classes, it is somewhat larger for moderate-income families (those whose income falls in the second through fourth deciles) than it is for poorer or richer families. Another issue is the geographic impact of a gasoline price increase. People in rural areas tend to drive more miles per year, on average, than those in urban areas. At the same time, public transportation is more accessible in urban areas.

Finally, the impact of a gasoline tax increase on the state’s overall economy would depend in part on whether the state reduced other taxes, used the added gasoline tax revenues to reduce state debt, or spent these

revenues. The impact would also be affected by a number of factors beyond the state’s control, such as changes to federal fuel efficiency standards, other states’ tax rates, and vehicle technology.

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