Taxing Gasoline: How Consumer Behavior is Affected

March 5, 2012
By Jenny Li Fowler

Oil producing countries may exercise profound influence over American driving habits, but a new Harvard Kennedy School faculty research paper shows the U.S. federal and state taxes also play an important role.

Gasoline Taxes and Consumer Behavior” finds that even small changes in gasoline taxes affect consumer behavior and that taxes affect behavior even more than commensurate increases in cost caused by rising oil prices.

The paper is co-authored by Shanjun Li, Cornell University; Joshua Linn, Resources for the Future; and Erich Muehlegger, associate professor of public policy at Harvard Kennedy School.

The researchers specifically analyzed the short-run impacts of gasoline taxes on driver decisions – gasoline consumption, vehicle miles traveled and vehicle choices – and the ways in which those impacts differ from those incited by changes in the price of gasoline exclusive of the tax.

“The purpose of our paper is to test the maintained assumption that consumers respond to gasoline tax and tax-exclusive price changes in the same way,” write the authors. “Our analysis directly estimates consumer responses to gasoline taxes by decomposing retail gasoline prices into tax and tax-exclusive components.”

Li, Linn and Muehlegger reached three primary conclusions:

  • Fuel taxes may be a more effective means for reducing gasoline consumption and/or inducing consumers to adopt more fuel-efficient vehicles than previously believed.

  • Gasoline tax changes can help to identify consumers’ implied discount rate.

  • The estimates suggest that traditional analyses of gasoline taxes may slightly overestimate the fiscal benefits of a gasoline tax and underestimate the affect gasoline taxes might have on consumer decisions.

“Our central and robust finding of differential responses to gasoline taxes and tax-exclusive prices has important implications for the effectiveness of using gasoline taxes to address climate change, air pollution, and energy security,” write the authors. “In particular gasoline taxes would be more effective than suggested by previous empirical estimates of the effect of gasoline price changes on gasoline consumption. The results also have implications for the … tax revenue from gasoline taxes.”

Erich Muehlegger’s research interests include industrial organization, regulation, and energy and environmental policy. One set of his ongoing research projects focuses on the effect of regulation on illegal activity including estimating the effects of regulatory innovation on fuel tax evasion and modeling cross-border cigarette excise tax avoidance.

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headshot of Erich Muehlegger

Erich Muehlegger, associate professor of public policy

“Our central and robust finding of differential responses to gasoline taxes and tax-exclusive prices has important implications for the effectiveness of using gasoline taxes to address climate change, air pollution, and energy security,” write the authors.

picture of someone's hand pumping gas