Diesel Tax Research Articles

Gasoline and Diesel Tax Incidence: The 2003 Washington State Nickel Funding Package

Abstract This paper considers a previously unexamined increase in excise taxes on gasoline and diesel fuel that were part of Washington State’s Nickel Funding Package of 2003. We fail to reject full pass-through of the amount of the tax increase to retail prices in both products. We find no significant sensitivity of retail pass-through to station locations relative to state borders or to retail competitive conditions as measured by local station density. The expansion of hypermarkets in Washington State during the period was a confounding factor in estimating tax pass-through effects.

Does Tax-Collection Invariance Hold? Evasion and the Pass-Through of State Diesel Taxes

In simple models, the incidence of a tax is independent of the identity of the remitting party. We illustrate that this prediction fails to hold if opportunities for evasion differ across economic agents. Second, we estimate how the incidence of state diesel taxes varies with the point of collection, where the remitting party varies across states and over time. Moving tax collection upstream from retailers substantially raises the pass-through of diesel taxes to consumers. Furthermore, tax revenues increase when collecting taxes from wholesalers rather than from retailers, suggesting that evasion is the likely explanation for the incidence result. (JEL H22, H25, H26, H71, L71)

Why truck distance taxes are contagious and drive fuel taxes to the bottom

This paper analyzes the way in which countries with international and local truck traffic decide to switch from a simple fuel tax system to a dual system of fuel and distance charge taxes. We show what drives a country to switch and how this affects the level of fuel taxes as well as incentives for other countries to also adopt the dual system. The model is partially able to explain the gradual extension of kilometer charging for trucks in Europe. The model also shows that, in the absence of diesel cars, the gradual introduction of kilometer charges will make fuel taxation for trucks virtually disappear and will lead to a system where truck use is (1) taxed mainly based on distance, (2) is taxed too heavily, and (3) where highest distance taxes are expected in transit countries with a strong market position. When the fuel tax must in addition serve as an externality tax for diesel cars, the introduction of distance charges for trucks will give rise to diesel taxes that are lower than the external cost of diesel cars. For trucks, this leads to a sum of diesel taxes and distance charges that are higher than the external cost of trucks.

Paying for harbor maintenance in the US: Options for moving past the Harbor Maintenance Tax

The Harbor Maintenance Tax is a fundamentally flawed maintenance funding mechanism for the critical US port system. Three alternatives were analyzed. User fee rates were estimated for either a national or regional tonnage based fee. Our results indicate that maintenance cost recovering regional fees could vary widely from about 10cents per tonne to nearly 80cents per tonne. A national rate would be about 30cents per tonne. The large regional differences and affects on bulk shippers are likely to make implementing and maintaining cost recovering tonnage based fees infeasible. Two other mechanisms are considered. One possibility is to abolish the HMT without a replacement mechanism. The obvious strength of this approach is its simplicity, the weaknesses is that it is not budget neutral. Another possibility is to increase the federal diesel tax rate. One strength of the approach is the reasonable rate increase required to recover port maintenance costs (estimated between 0.278 and 0.315cents per liter). An additional strength is that relatively inefficient fuel users will either make the largest share of the additional payments or the freight will shift modes to one that is more efficient. One weakness is that the rate has been unchanged since 1997, this points to the political difficulty involved in passing such a rate increase.

The Welfare Effects of Fuel Conservation Policies in the Indian Car Market

The Indian car market is the fastest growing in the world. With increased mobility has come increased foreign oil dependence, fuel consumption, and associated externalities. In response to this, the Indian government is contemplating fuel economy standards, but at the same time continues to subsidize diesel fuel. The result is a diesel discount of 30%, relative to petrol, and an increasing market share of diesel cars. We use a model of vehicle choice and kilometers driven to compare the welfare impacts of two possible fuel conservation policies: a tax on diesel fuel that would equalize diesel and petrol prices, and a diesel car tax. The latter is an alternative to taxing diesel fuel recently proposed by the Indian government. We find in 2006 that a diesel fuel tax that equalizes petrol and diesel prices reduces total fuel consumption by about 9 percent, at a deadweight loss of about 8 Rs. per liter of fuel saved. The tax reduces the market share of new diesel vehicles by 4.6 percentage points. A diesel car tax of 25% would achieve the same reduction in market share; however, it would reduce total fuel consumption by only 1.5 percent, at a deadweight loss of about 30 Rs. per liter saved. A smaller diesel fuel tax, sufficient to yield the same total fuel conservation as the diesel car tax, actually results in a net welfare gain: The increase in petrol fuel revenues as buyers switch from diesel to petrol cars exceeds the deadweight loss of the diesel tax.

Response of Tax Credit Claims to Tax Enforcement: Evidence from a Quasi‐Experiment in Chile

AbstractDiesel in Chile receives different tax treatments depending on its use. If diesel is used in industrial activities, the diesel taxes paid can be fully used as a credit against VAT, but if it is used in freight or public transportation – basically trucks and buses – only a fraction of diesel taxes paid can be claimed as a tax credit for VAT payments. As a result of this different tax treatment, firms have incentives to use ‘tax‐exempted’ diesel in activities requiring ‘non‐tax‐exempted’ diesel. This tax wedge therefore generates an opportunity for tax evasion, especially for firms with multiple economic activities, one of them being transport. In this paper, we analyse the impact of a tax enforcement programme implemented by the Chilean Internal Revenue Service (IRS), where letters requiring information about diesel purchases and use and vehicle ownership were sent to around 200 firms in 2003. Using different empirical strategies to consider the non‐randomness of the selection of firms, the empirical results show consistently that firms receiving a letter decreased their diesel tax credits by around 10 per cent.

Higher fuel prices are associated with lower air pollution levels

Air pollution is a persistent problem in urban areas, and traffic emissions are a major cause of poor air quality. Policies to curb pollution levels often involve raising the price of using private vehicles, for example, congestion charges. We were interested in whether higher fuel prices were associated with decreased air pollution levels. We examined an association between diesel and petrol prices and four traffic-related pollutants in Brisbane from 2010 to 2013. We used a regression model and examined pollution levels up to 16days after the price change. Higher diesel prices were associated with statistically significant short-term reductions in carbon monoxide and nitrogen oxides. Changes in petrol prices had no impact on air pollution. Raising diesel taxes in Australia could be justified as a public health measure. As raising taxes is politically unpopular, an alternative political approach would be to remove schemes that put a downward pressure on fuel prices, such as industry subsidies and shopping vouchers that give fuel discounts.

Asymmetric competition in the setting of diesel excise taxes in EU countries

This paper tests new implications of the asymmetric tax competition model on diesel excise taxes. We extend the standard tax competition model by replacing the unit demand assumption with iso-elastic demand. As a result, not only the level of the equilibrium tax, but also the slope of the tax reaction function depends positively on the size of the country. The new implication is tested on panel data in first differences for 16 countries of Western Europe. The results provide strong evidence for strategic interaction in the setting of diesel excises and confirm the effect of country size on the response to tax changes in neighbouring countries. Strategic interaction between EU countries intensified in the mid-1990s and drove small European countries to set lower diesel tax rates. These results explain why the EU’s minimum tax policy has failed to harmonise diesel tax rates.

Putting a Tax on Oil

We investigate the possibility of using a percentage tax on crude oil and imported refined oil products consumed in the United States to fund the nation’s transportation infrastructure. This tax on oil could replace existing gasoline and diesel taxes and, potentially, other transportation taxes, such as taxes on airline tickets. The revenues from this tax could be used to fully fund federal infrastructure expenditures on highways, public transit, and aviation. The goal of this article is to raise the key issues associated with using an oil tax to fund U.S. transportation infrastructure, identify decisions Congress would need to make in designing such a tax, and outline some of the likely implications of adopting such a tax.

Tax Credits Response to Tax Enforcement: Evidence from a Quasi-Experiment in Chile

Diesel in Chile receives a different tax treatment depending on its use. If diesel is used in industrial activities the diesel tax paid can be used as a credit against VAT and if diesel is used in freight or public transportation (basically trucks and buses) a fraction of gasoline taxes paid can be used as a credit against VAT. As a result of this different tax treatment firms have incentives to use “tax exempted” diesel in activities requiring “non tax exempted” diesel. This price wedge generates and opportunity for tax evasion. In this paper we analyze the impact of a tax enforcement program implemented by the Chilean IRS, where letters requiring information about diesel tax credits were sent to around 200 firms in 2003. Using different empirical strategies to consider the non-randomness of the selection of firms, we find that firms receiving a letter decreased their diesel tax credits by 16%.

Differential fuel taxes and their effects on automobile demand

Fuel taxation policy in Chile has always been to keep taxes on diesel lower than those on gasoline. The proportion of automobiles with diesel engines has grown considerably as a result. Just 20% of diesel engine emissions are equivalent to 80% of gasoline engine emissions, and this affects the level of externalities associated with automobile use, especially in cities such as Santiago where pollution levels are high. This study estimates the effect of the fuel tax differential on automobile demand. The findings indicate diesel automobile demand elasticities of -3.4 and 2.1 with respect to the price of the vehicle and the tax differential. The scale of these effects means there is scope for substantial emissions cuts by way of tax changes to equalize gasoline and diesel tax rates and create a specific tax on diesel automobiles.

Fuel Tax Incidence in Developing Countries: The Case of Costa Rica

Although fuel taxes are a practical means of curbing vehicular air pollution, congestion, and accidents in developing countries - all of which are typically major problems - they are often opposed on distributional grounds. Yet few studies have investigated fuel tax incidence in a developing country context. We use household survey data and income-outcome coefficients to analyze fuel tax incidence in Costa Rica. We find that the effect of a 10 percent fuel price hike through direct spending on gasoline would be progressive, its effect through spending on diesel - both directly and via bus transportation - would be regressive (mainly because poorer households rely heavily on buses), and its effect through spending on goods other than fuel and bus transportation would be relatively small, albeit regressive. Finally, we find that although the overall effect of a 10 percent fuel price hike through all types of direct and indirect spending would be slightly regressive, the magnitude of this combined effect would be modest. We conclude that distributional concerns need not rule out using fuel taxes to address pressing public health and safety problems, particularly if gasoline and diesel taxes can be differentiated.

The Effects of Gasoline Differential Taxation on Automobile Demand (Efectos Del Diferencial De Impuestos a Las Gasolinas En La Demanda De Automóviles)

The gasoline tax policy in Chile has always kept lower tax rates for gasoline relative to diesel. As a result, the share of diesel cars has been systematically growing, especially over the last 5 years. Given that, on average, 20% of diesel engine emissions are equivalent to 80% of gasoline engine emissions, the increase in diesel cars has impacts on the magnitude of negative externalities associated to cars use. In the case of cities like Santiago, with high levels of pollution, the impact might be large and important.In this paper I estimate the effect of the differential tax rates between diesel and gasoline on the automobile demand in Chile. The results show diesel cars demand elasticities of 3.4 and 2.1 with respect to price and the difference in tax rate respectively. The magnitude of the elasticities show that a change in tax policy, towards equalizing diesel and gasoline tax rates and enacting a diesel car tax, would have a large impact in terms of reducing emissions and pollution in Chile.

Fuel tax incidence in developing countries: The case of Costa Rica

Although fuel taxes are a practical means of curbing vehicular air pollution, congestion, and accidents in developing countries—all of which are typically major problems—they are often opposed on distributional grounds. Yet few studies have investigated fuel tax incidence in a developing country context. We use household survey data and income–outcome coefficients to analyze fuel tax incidence in Costa Rica. We find that the effect of a 10% fuel price hike through direct spending on gasoline would be progressive, its effect through spending on diesel—both directly and via bus transportation—would be regressive (mainly because poorer households rely heavily on buses), and its effect through spending on goods other than fuel and bus transportation would be relatively small, albeit regressive. Finally, we find that the overall effect of a 10% fuel price hike through all types of direct and indirect spending would be neutral and the magnitude of this combined effect would be modest. We conclude that distributional concerns need not rule out using fuel taxes to address pressing public health and safety problems, particularly if gasoline and diesel taxes can be differentiated.

Measuring Illegal Activity and the Effects of Regulatory Innovation: Tax Evasion and the Dyeing of Untaxed Diesel

This article examines tax evasion in the diesel fuel market. Diesel fuel used for on‐road purposes is taxed, while other uses are untaxed, creating an incentive for firms and individuals to evade on‐road diesel taxes by purchasing untaxed diesel fuel and then using it for on‐road use. We examine the effects of a federal regulatory innovation in October 1993, the addition of red dye to untaxed diesel fuel at the point of distribution, which significantly lowered the cost of regulatory enforcement. We find that sales of diesel fuel rose 26 percent following the regulatory change, while sales of heating oil, which is an untaxed perfect substitute, fell by a similar amount. The effect on sales was higher in states with higher tax rates and in states likely to have higher audit costs. We also find evidence that heating oil sales were less responsive to demand factors, such as temperature, prior to the dye program, indicating that a significant fraction of predye sales was illegitimate. Furthermore, we find a pattern of price and tax elasticities consistent with innovation in new evasion techniques subsequent to the regulatory change. Finally, we estimate that the elasticity of tax revenues with respect to the tax rate was 0.60 prior to the dye program yet would have been 0.85 in the absence of evasion.

Measuring Illegal Activity and the Effects of Regulatory Innovation: A Study of Diesel Fuel Tax Evasion

The taxation of diesel fuel varies by use. Consumers using diesel fuel on-road must pay state and federal highway taxes while diesel fuel consumed for residential heating, industrial use, farming or off-road travel do not pay taxes. Variation in the taxation of diesel fuel creates the incentive for firms and individuals to evade on-road diesel taxes by purchasing untaxed diesel fuel and then using or reselling it for on-road use. This paper studies the incentives for tax evasion and the effects of regulatory changes meant to limit evasion of on-road diesel taxes. We propose a model of fuel tax evasion in which firms choose to purchase quantities of taxed and untaxed diesel fuel based on a heterogenous cost of evading and an endogenously set level of regulatory enforcement. We use this model to propose an empirical test for evasion requiring only data on observed taxed quantities, not the potentially unobserved evaded quantities. We then empirically study the effects of regulatory innovation in October 1993, including the addition of dye to untaxed diesel fuel, which increase the costs of evasion and lower the costs of regulatory enforcement. We estimate the effect of the regulatory changes on state-level sales of diesel fuel and untaxed heating oil. We find that sales of diesel fuel rose 29 percent following the regulatory change while sales of untaxed heating oil fell by a similar amount. This suggests that the regulatory changes substantially limited the amount of diesel fuel tax evasion. The increase in diesel consumption was higher in states with higher tax rates and in states with more legitimate home heating oil use.

Determinants of state diesel fuel excise tax rates: the political economy of fuel taxation in the United States

Ever-escalating gasoline and diesel fuel prices in the United States (US) are prompting some states to temporarily suspend the collections of gasoline, and in fewer instances, diesel fuel, taxes. The focus of this paper is on the determinants of US state excise taxes levied specifically on diesel fuel. Among other things, we find the freight trucking industry’s contribution to total state employment is a highly significant determinant of a state’s diesel tax rate, consistently suggesting that the greater this contribution, the lower the tax rate, ceteris paribus. We find little evidence that the degree of freight transportation usage on state highways impacts diesel tax rates. These two findings taken together suggest that state legislators, when determining the diesel tax rate, exhibit behavior consistent with Stigler’s (Bell J Econ Manag Sci 2: 3–21, 1971) economic or positive theory of regulation. Moreover, state law makers appear less concerned over the impact that heavy freight transportation has on highway infrastructure, which appears to be at odds with the public interest or normative theory of regulation as articulated by Posner (Bell J Econ Manag Sci 4: 335–358, 1974).

AN EVALUATION OF THE ECONOMICS OF FUEL CELLS IN URBAN BUSES

One of the contenders for a clean source of on-board electric power in a vehicle is the fuel cell: an electrochemical device that transforms the chemical energy stored in a fuel directly into electricity. While less widely known and less far advanced than batteries, fuel cells hold a considerable potential to provide the power for a novel generation of non-polluting vehicles. At present, fuel cell technology is entering the stage of commercialization, which is an appropriate moment to try and assess its economic potential in the field of transport. Based on a review of the present state of the technology, concentrating on the solid polymer fuel cell, a model is set up of a fleet of urban buses, widely regarded as one of the earliest applications of fuel cells in transport. Under the central assumption that the fuel cell stack cost is $300 per kilowatt, the fuel cell bus is found to be around 30% more expensive than its diesel counterpart. However, there are considerable cost reductions possible through economies of scale in the production of hydrogen, the fuel required for the solid polymer fuel cell. Remarkably, these economies of scale allow the cost of the fuel cell bus to drop below that of the diesel. What is more, the fleet size required for this—more than 25 vehicles—is by no means prohibitive. In a trade-off analysis, the possibility is investigated of reducing the cost by allowing one parameter to deteriorate, if this permits another one to improve. In particular, it is found that cheaper (mass-) production techniques for the fuel cell at the expense of reduced efficiency make economic sense if a relative drop in the efficiency of 1% is accompanied by a cost reduction of at least 1⋅06%—something that is likely to be attainable. A scenario for a direct methanol fuel cell, assuming a cost per kilowatt three times as high as for the solid polymer fuel cell, results in a slightly higher overall cost, without being able to offer the same economies of scale in fuel provision. The social costs are calculated also, taking into account the environmental externalities associated with the whole system including the fuel supply chain. The inclusion of externalities fails to shift the balance decisively in favour of the fuel cell, partly because of a cancellation effect between the diesel tax, which has to be excluded in a social cost calculation, and the externalities, which are added in. The main outcome is therefore that in order to succeed in the marketplace, the principal task for the developers of fuel cells is a further reduction of the cost. © 1997 by John Wiley & Sons, Ltd.