Policymakers use taxes as a means to raise revenue that serves public needs and to influence market outcomes (Mankiw, 2012).
House of Representatives Democrat (Oregon) Earl Blumenauer is proposing an increase in the federal gas tax in order to support the shortage of funding for the Highway Trust Fund, which supports our nation’s highway and transit systems. Citing a lack of infrastructure funding to support degraded roads, mass transit, and bridges, he proposes an increase of $0.15 to the federal gas tax from $0.184 to $0.334 a gallon. Arguments for increasing the gas tax include:
1) The federal government has not increased the federal gas tax since 1993.
2) The current tax has not kept up with inflation
3) The emergence of more fuel-efficient vehicles has led to a decline in gasoline consumption.
In addition to federal taxes, states also collect gas taxes. However, states rely on the Highway Trust Fund to support about 50% of their transportation funding. According to Blumenauer, a $0.15 tax increase will raise around $170 billion in additional funding over the next decade. Representative Blumenauer’s proposal is support by AAA Foundation for Traffic Safety, among other agencies. According to Blumenauer, the gas tax places the burden of the tax on those who use the roadways (The Washington Post, 2013). However, do the buyers of gasoline really share in the entire burden?
IMPACT ON SUPPLY AND DEMAND
In the short run, both the supply and demand for gasoline are relatively inelastic. Supply is inelastic because sellers do not immediately change their production. Demand is inelastic because consumption habits do not change immediately to the increase in price. For this discussion, I will focus on the effect in the short run. For the sake of this example, we will assume the average price for a gallon of gas is $3.50 (before the tax increase). The quantities in the table below represent gallons demanded and supplied. The quantities are in billions. Below graph represents the affect in the short run.
When a $0.15 tax hike is imposed on buyers, the demand curve shifts downward by the size of the tax ($0.15). For the sellers of gasoline, the old equilibrium price of $3.50 now becomes $3.43. The sellers of gasoline will now receive $3.43 per gallon of gas versus $3.50. For the buyers of gasoline, the old equilibrium price of $3.50 now becomes $3.58. The buyers of gasoline will now pay $3.58 per gallon of gas versus $3.50. The net effect of a $0.15 gas tax increase is that sellers will receive less revenue and buyers will pay more for gas. In addition, the quantity demanded shifts from an equilibrium of 11 billion gallons to around 10.5 billion. Therefore, the gas tax increase will result in a decrease in the supply and consumption of gasoline. In conclusion, both buyers and sellers of gasoline share in the burden of this tax increase.
Gasoline demand is relatively inelastic in the short term. But if higher prices continue, people adopt...