Differential demand response to gasoline taxes and prices in the U.S

This paper offers new evidence concerning the difference in consumers’ reactions to changes in gasoline taxes relative to changes in gasoline prices. Using microdata from the 2007 to 2009 rounds of the U.S. Consumer Expenditure Survey, we estimate a complete system of demand augmented with information on gasoline excise taxes. By relying on a complete system of demand, rather than on single equations, we are able to estimate elasticities that take behavioral responses into account. In addition, we allow gasoline taxes to affect demand in two distinct ways: through relative prices and as policy signals. Elasticities of gasoline demand with respect to gasoline excise taxes and gasoline retail prices are computed and contrasted. A gasoline price increase of 13.2 ¢/gallon, corresponding to a $15/tCO2 carbon tax, is then considered for simulation. We find that, on average, the reduction in gasoline demand caused by a tax increase is, in the long run, almost ten times as big as that induced by an equal (tax-unrelated) price increase. The same measure of differential demand response is computed both for four U.S. broad regions and by income quintile. We discuss the implications of our findings for the design of energy policies. JEL codes: C3, D1, H3, Q4