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

Abstract

This paper offers new evidence concerning the difference in consumers’ reactions to changes in gasoline taxes relative to market-induced 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, we are able to estimate elasticities that take behavioral responses into account. Crucially, the model allows gasoline taxes to affect demand in two distinct ways: through relative prices and as long-run policy signals. Different increases in gasoline taxes are considered for simulation. A 13.2¢/gallon tax increase, corresponding to a $15/tCO2 carbon tax, is found to cause, in the long run, a reduction in gasoline demand that is about seven times as big as that induced by an equal market-induced price increase. The same measure of differential demand response is derived for tax increases different in size as well as by income quintile and by region. We discuss the implications of our findings for the design of corrective taxation in the private transport sector.