Samuel Asare, Joseph Burrier & Nicholas Dorsey
Public Sector Economics' Project
December 5, 2014.
Raising the Federal Gasoline Tax to Reduce Dependency on Imported Oil
Section I:
Motivation
According to the U.S. Department of Energy, about one-third of gasoline used in the country
is imported and costs the economy about $192 billion annually on average. In 2013, U.S. spending
on foreign oil totaled in at $247 billion. Gasoline consumption continued to increase over time
resulting in the need to increase imports annually until just 7 years ago when the net import decreased.
Figure 1 in the appendix is an extract from the U.S. Department of Energy showing trends of daily
net imports of petroleum in the United States from 1970 to 2013. Clearly, the net daily import of
petroleum has been increasing significantly especially in the 2000's which indicates that gas
consumption has been increasing over time.
In the year 2011, Obama's administration established a national goal of reducing gasoline
imports by one-third by the year 2020 and later elevated the goal in 2012 to reduce it by half by 2020
(Furman and Sperling, 2013). Even though he didn't include raising federal tax on gasoline as one of
the approaches to reduce dependency on oil import, some politicians and economists advocate that it
will be an appropriate policy to reduce the high dependency on imported oil. The purpose of this
research paper is to analyze whether raising federal gasoline tax to reduce dependency on imported
oil is a good and appropriate public policy in the U.S.’ economy. We devote Section II to consider
the background and history of federal gasoline tax, its revenues generated for the government and
trends in imports of crude oil over the years. A detailed assessment of the policy from efficiency,
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equity and fairness, adequacy and feasibility perspectives will be considered in Section III. Section
V summarizes and concludes this research paper.
Section II: Background of Federal Gasoline Tax, Developments and Gasoline Tax Revenues
The first state to levy tax on gasoline was Oregon in 1919. By 1932, all states in the U.S. had
followed suit by enacting legislation imposing gasoline taxes ranging from one cent to seven cents.
Before the 1932 Revenue Act, the U.S. congress was reluctant to impose gasoline taxes at the federal
level (Francis, 2001). Up to that point in time, Congress had preferred that individual states impose
such taxes to finance their revenue needs. However in the year 1932, there was huge budgetary
imbalance that gave rise to the need to impose gasoline tax in all states in order to raise revenue to
finance and correct the budgetary imbalance. Since then, federal gasoline taxes have been a
permanent policy and the amount per gallon imposed has changed over time. Table 2 in the appendix
shows the nominal tax amount charged per gallon from 1933 to 2014. Even though the nominal
gasoline tax amounts have been in-between ¢1and ¢18.4per gallon and has not changed frequently,
it is not the case when one considers real tax rate per gallon. Since its last increase in October 1993,
the nominal federal gasoline tax has been consistent at its current level of ¢18.4 per gallon. However,
when the nominal tax per gallon is adjusted for inflation, there is more volatility in the tax per gallon
charged over time. The adjusted estimates indicates that the real tax per gallon falls in-between ¢9
and ¢30when 2013 is used as the base year. Figure 2 in the appendix shows the trend of real gasoline
tax per gallon over time. Graphically, one can identify a cyclical variation in the real gasoline tax
over time. This cyclical variation can be said to occur when the nominal tax per gallon is changed
and/or when inflation rate changes dramatically. People change their consumption behavior and
eventually return to their normal consumption pattern in the long run which increases real revenue.
2
Significant amounts of revenue have been raised from gasoline tax over the years. Both
nominal and real revenues have been increasing over time. Real revenues generated has been inbetween $2.2 billion and $31.1 billion when the base year is 2013.Adjusting for inflation, Figure 4
shows an upward trend in real revenue stemming from gasoline taxes. However, there are periods of
downturns where real revenue falls. For example, between 1972 through 1983, the real revenue from
gasoline tax fell drastically. Also, the graph shows that there is a persistent cyclical variation in the
real revenue.
According to the U.S. Department of Energy, the US daily production of crude oil has been
increasing steadily since 2005. As a result, net imports of gasoline have been decreasing steadily too.
“In 2013, the United States consumed a total of 6.89 billion barrels of petroleum products, an average
of 18.89 million barrels per day” and daily domestic production was 7.462 million barrels per day
which was an increase of 0.43 million barrels over 2012. Provided in the appendix is Figure 3 which
shows how net imports of crude oil has been decreasing over time.
The price elasticity of demand for gasoline, which shows the percentage change in gasoline
consumption in response to a percentage change in price or tax on gasoline, has been estimated by
many researchers in the field of energy economics. Espey (1998) summarizes both short run and long
run parameter estimates of price elasticity of demand for gasoline that various authors have found in
the U.S. By plotting a histogram of 98 different estimates found by the researchers, Espey (1998)
concluded that most of the short run price elasticity of demand for gasoline lies in-between 0 to 0.25
with median of 0.23. However, in the long run, the paper found that the mode all the 98 estimates lies
in-between 0.26 and 0.50 with median of 0.43. Figures 5 and 6 show an extract from Espey (1998)
that plots bar charts of both short run and long run estimates by various research papers in literature.
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Basically, the bottom line is that the price elasticity of demand in both the short run and long run
is not zero. That is, any change in the price of gasoline either through changes in gasoline tax or
change in the direct price affects gasoline consumption by less than proportionate but significant.
Section III:
Policy Evaluation
In order to make a final determination whether raising the federal gasoline tax is ultimately good and
appropriate policy for the U.S.’ economy, we must establish criteria for this tax to be evaluated. Is
this tax going to be efficient? Will the tax be equitable? Can the tax increase be adequate to meet
revenue needs? Lastly, would implementation of the proposed tax be feasible?
The main consideration when determining if the proposed tax increase will be economically
efficient is “How does this tax distort economic behavior?” Taxes are more efficient when its
associated deadweight loss can be minimized. This means that a tax is truly only completely efficient
when there is no deadweight loss involved. However, a tax can still be relatively efficient if it is
imposed on a good or service with price inelastic demand or supply. In this case where gasoline
demand has fairly inelastic demand determined to be 0.23 in the short-run and increasing to 0.43 in
the long run, imposing a tax which equates to a 10% increase in price will decrease demand by 2.3%
in the short-run and as consumers find substitutes to gasoline fueled transport, they further
consumption resulting in a 4.3% in the long run. The decrease in demand is although substantial, it is
not enough to reject the tax proposal on grounds of economic inefficiency.
Next item to consider to evaluate the gasoline tax proposal is equity. In theory, distribution of
the tax burden should be equitable as far as fairness is concerned. There are two dimensions to look
at when examining the “fairness” of a tax. There are two dimensions to analyze when one is
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examining fairness; horizontal and vertical equities. With horizontal equity, we ask “does this tax
treat equals the same?” Equals are considered as those in the same income class. When looking at the
horizontal equity of a gasoline tax, we conclude that it is not an equitable proposal. Each individual
will be affected differently depending on how far they drive on average. Two equals with one who
frequently use public transportation, ride their bike or drive an electric car whilst the other person
uses highly consumed fuel car are not treated equally to ensure horizontal equity. This kind of tax
discriminates and burden depends on the type of consumption choices that one opts for.
On vertical equity, we consider how unequals will treated when the tax is imposed. In this
case, unequals are considered individuals of different income levels. When looking at vertical equity,
we first want to identify how the tax structured. Gasoline, always considered to be a normal good,
will have increases in demand as income rises. This demand is going to be driven by extra weekend
trips or more frequent vacations that can be afforded by those in higher income brackets. The tax will
not have much impact on higher income earners because it will form small proportion of their income
compared to lower income earners. In this case, the tax is considered to be regressive in nature,
meaning that it disproportionately affects different income groups. Also, excise taxes are usually
regressive in nature when fixed amount are charged on every consumer. Those with lower incomes
are likely to own older, less fuel efficient vehicles which directly leads them to either reduce
consumption below ideal levels and pay more taxes due to the per gallon assessments.
Although the main goal of a proposed tax increase on gasoline is aimed at reducing domestic
dependency on foreign oil, it is also important to determine if increasing tax rates would raise enough
revenue to meet the needs. In 2011, according to the American Road and Transportation Builders
5
Association (ARTBA)1, state transportation departments spent a total of $113.1 billion on highway
capital improvements, including federal funds. Also, $40.2 billion, or 40.2% of this investment was
spent strictly on repair projects to improve 126,879 miles of highway and 4,670 bridges. In the same
year, taxes on motor fuel raised only $41.232 billion in total revenue, just enough to cover repair
projects but only meeting 36.4% of total costs. Even with total funding currently significantly
exceeding revenue generation, the Federal Highway Administration found that 182,872 miles, or 20.5
percent, of major highways were dilapidated and needed repaving or substantive repairs. When
including all roads, the Federal Highway Administration estimated that 656,039 miles of road in total
needed such repairs. Current levels of gasoline taxation are completely incapable of supporting
necessary repairs and expansions of the roadways in the country. A substantial increase in gasoline
taxes will be necessary to raise revenue to adequate levels that can eliminate the gap between revenues
and expenditure on highways.
Taking into consideration all of the previous analysis, we need to consider the feasibility of
the tax proposal. From the administrative side, the tax increment on gasoline will be incredibly easy
to implement. All fuel stations are currently collecting this tax at its current level and it will add
practically no burden to them to adjust the tax level. The government already has its collections
processes in place and will costs less to raise the tax rate. The tax increases will also not require any
additional actions or procedures to implement in order to comply with the new laws. However, the
difficultly in the proposal stems from the visibility of this tax. Consumers will notice this tax
increment whenever the price changes especially in periods when the prices are increasing. Also, this
tax proposal increase will affect nearly every American citizen. The proposal will likely be receive
1
The important information provided in this paragraph were retrieved from ARTBA website:
http://www.artba.org/about/transportation-faqs/#2
2
These figure include state and local taxes
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the disapproval of the median voter. For example, in April 2013 Gallup poll, two-thirds of respondents
opposed increasing state-level gasoline tax up to ¢20 to improve roads, bridges and mass transit, an
overwhelming 66%3. Similar results will be found if the poll was on federal gasoline tax increment.
When it comes to raising gasoline taxes, even with the ease of implementation, the feasibility of an
adequate increase is in problem because of different public opinion.
Section V:
Summary and Conclusion
Increasing the gasoline tax will be good public policy. Considering efficiency, this tax will help
minimize deadweight loss due to the inelastic demand for gasoline. In terms of equity, there is cause
for concern in this policy because it does not generate a horizontally equitable situation due to the
fact that same income people do not pay same tax because different choices of the mode of
transportation. Vertically, this tax is regressive which causes lower income earners to pay a larger
portion of annual income compared to higher income earners. Currently, the United States Federal
Highway Administration is experiencing a large budgetary shortfall. Revenues raised from the gas
tax not sufficiently covering highway maintenance and expansion. Increases in the tax will assist the
budgetary shortfall. Historically, increasing the tax level have been a difficult policy to implement
due to negative public opinion. However, this tax will be more feasible in this current period
decreasing gas prices. Currently gas prices have been consistently decreasing over the past 5 months
which will make a tax increases more tolerable for consumers. We propose that the government enact
a tax increase during this period of low prices. This will greatly improve the political feasibility aspect
because it will normalize gasoline price to previous levels that consumers are accustomed to paying.
3
http://www.taxhistory.org/thp/readings.nsf/ArtWeb/1B663ACC1F6D710F85257D1B00412409?OpenDocument
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References
"Frequently Asked Questions." American Road Builders and Transportation Association. N.p., n.d.
Web. 2014. <http://www.artba.org/about/transportation-faqs/#2>
"Highway History." U.S. Department of Transportation, Federal Highway Administration. N.p.,
n.d. Web. October 17, 2013. < http://www.fhwa.dot.gov/infrastructure/gastax.cfm>
"Federal and State Gasoline Tax Rates." U.S. Department of Transportation, Federal Highway
Administration. N.p., n.d. Web. April 4, 2011. <http://www.fhwa.dot.gov/ohim/onh00/table2.htm>
"Reduce oil dependency costs." U.S. Department of Energy, Energy Efficiency and Renewable
Energy. N.p., n.d. Web. n.d. < http://www.fueleconomy.gov/feg/oildep.shtml>.
Furman, J and Sperling, G (2013). "Reducing America’s Dependence on Foreign Oil as a Strategy
to Increase Economic Growth and Reduce Economic Vulnerability." The White House Blog,
President Barack Obama. Web. August 30, 2013.
<http://www.whitehouse.gov/blog/2013/08/29/reducing-america-s-dependence-foreign-oil-strategyincrease-economic-growth-and-redu>.
"Annual Federal Tax Revenues by Type of Tax 1996-2012." Tax Policy Centre, Urban Institute
and Brooking Institutions. N.p., n.d. Web. May 8, 2014.
<http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=74><http://www.taxpolicycenter
.org/taxfacts/Content/PDF/excise_type.pdf>.
Espey, Molly. "Gasoline demand revisited: an international meta-analysis of elasticities." Energy
Economics 20.3 (1998): 273-295.
Francis, Brian. "Gasoline Excise Taxes, 1933–2000." Internal Revenue Service, Statistics of Income
Bulletin (2001).
"Petroleum and Other Liquids, US net import of crude oil and products." U.S. Energy Information
Administration. N.p., n.d. Web. November 26, 2014.
<http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=MTTNTUS2&f=A>.
"Short-Term Energy Analysis." U.S. Energy Information Administration. N.p., n.d. Web. November
12, 2014. <http://www.eia.gov/forecasts/steo/>.
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Appendix
Table 1: Federal Gasoline Tax (1932- 2014)
Period
Amount per gallon (in cents)
1933 - 1940
1.0
1941 - 1951
1.5
1952 - 1956
2.0
1957 - 1959
3.0
1960 - 1983
4.0
1984 - 1987
9.0
1988 - 1990
9.1
1991 - 1993
14.1
1994 - 1995
18.4
1996 - 1997
18.3
1998 - 2014
18.4
Source: US Department of Transportation
Table 2:
Year
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
U.S. Net Imports of Crude Oil and Petroleum
Products (Thousand Barrels per Day)
Quantity
Year
Quantity
6,025
1994
8,054
5,892
1995
7,886
5,846
1996
8,498
7,090
1997
9,158
8,565
1998
9,764
8,002
1999
9,912
7,985
2000
10,419
6,365
2001
10,900
5,401
2002
10,546
4,298
2003
11,238
4,312
2004
12,097
4,715
2005
12,549
4,286
2006
12,390
5,439
2007
12,036
5,914
2008
11,114
6,587
2009
9,667
7,202
2010
9,441
7,161
2011
8,450
6,626
2012
7,393
6,938
2013
6,237
7,618
Source: US Energy Information Administration
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Figure 1
Source: U.S. Energy Information Administration
Figure 2
Real Gasoline Tax (cent per gallon)
35.0
30.0
25.0
20.0
15.0
10.0
5.0
1933
1936
1939
1942
1945
1948
1951
1954
1957
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
0.0
Source: US Department of Transportation
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Figure 3
U.S. Net Imports of Crude Oil and Petroleum Products
(Thousand Barrels per Day)
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
Source: US Energy Information Administration
Figure 4
Federal Real Gasoline Tax Revenue (billions of dollar)
35.0
30.0
25.0
20.0
15.0
10.0
5.0
1933
1936
1939
1942
1945
1948
1951
1954
1957
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
0.0
Source: Tax Policy Centre& Francis, B. (2001)
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Figure 5
Source: Espey (1998)
Figure 6
Source: Espey (1998)
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