Stranded Vehicles: How Gasoline Taxes Change the Value of Households’ Vehicle Assets

Economists tend to favor Pigouvian taxes or cap-and-trade programs to correct the negative externalities of climate change and local pollution caused by the burning of fossil fuels. Arguments against energy taxes, and gasoline taxes more specifically, often include concerns about the regressivity of the tax. Other concerns relate to the geographic incidence of the tax. We study the effect of a gasoline tax using changes in vehicle values. We construct three measures of households’ capital loss from a gasoline tax and show how they vary across income, geography, and political party. We show that that the capital loss from the tax varies considerably across states; the Midwestern states bear a much higher burden than states in the Northeast. This geographic variation is also correlated with political affiliation; census tracts with a higher share of residents voting for President Bush in the 2000 election experience a higher loss in the value of their vehicles. We find that gasoline taxes are initially progressive; the loss in capital value as a share of income is increasing with income over the first three deciles, but then steeply decreases after the fourth decile. However, if tax revenues are equally distributed to households, the policy is highly progressive for the first four income deciles and largely income neutral thereafter. ** Preliminary – do not cite ** ∗This paper has benefited from Severin Borenstein, Dick Schmalensee and Joseph Doyle. Busse: Associate Professor of Management and Strategy, Kellogg School of Management, Northwestern University and NBER, email: [email protected]. Knittel: William Barton Rogers Professor of Energy Economics, Sloan School of Management, MIT and NBER, email: [email protected]. Zettelmeyer: Nancy L. Ertle Professor of Marketing, Kellogg School of Management, Northwestern University and NBER, email: [email protected].