Understanding the heterogeneous effects of gasoline taxes across income and location

Abstract

Using confidential household-level data, we estimate spatial and demographic heterogeneity in household-level gasoline price elasticities and gasoline tax burdens from a 60-cent federal gasoline tax increase. In order to address unobserved consumer heterogeneity, we employ a parametric adaptation of the maximum score methodology to model the household’s choice of vehicles and driving decisions, allowing for disaggregated vehicle choices, vehicle-specific fixed effects, and interactions among the multiple vehicles in each household. We estimate average price elasticities of demand for gasoline at -0.74, with significant heterogeneity across space and demographics. We also find that rural and poor households bear the greater share of the burden from increasing taxes. Finally, we suggest a revenue recycling policy that helps mitigate the gasoline tax's resulting economic inequalities across household location and income. In addition, though a gasoline tax is an effective policy for reducing the externalities associated with driving, our policy also allows the government to retain some revenue from the tax even after the revenue recycling.