Gasoline Taxes and Consumer Behavior

Gasoline taxes can correct externalities associated with automobile use, reduce dependency on foreign oil, and raise government revenue. Our understanding of the optimal gasoline tax and the efficacy of existing taxes is largely based on empirical analysis of consumer responses to gasoline price changes. In this paper, we directly examine how gasoline taxes affect consumer behavior as distinct from tax-exclusive gasoline prices. Our analysis shows that a 5 cent tax increase reduces gasoline consumption by 1.3 percent in the short-run. The response is six times as large as that from a 5 cent tax-exclusive gasoline price increase, which suggests that traditional analysis could significantly underestimate policy impacts of tax changes. We further investigate the differential effects from gasoline taxes and tax-exclusive gasoline prices on the intensive and extensive margins of gasoline consumption. We discuss implications of our findings for the estimation of the implicit discount rate for vehicle purchases and for the fiscal benefits of raising taxes.