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The signaling effect of gasoline taxes and its distributional implications

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Abstract

This paper proposes and tests a better-defined interpretation of the different responses of gasoline demand to tax changes and to market-related price changes. Namely, the signaling effect of gasoline taxes is one that impacts on long-run consumer decisions in addition to the incentives provided by tax-inclusive gasoline prices. Our hypothesis is tested using a complete demand system augmented with information on gasoline taxes and fitted to household-level data from the 2006 to 2013 rounds of the US Consumer Expenditure survey. Information on gasoline taxes is found to be a significant determinant of household demand additional to tax-inclusive gasoline prices. The equity implications are examined by contrasting the incidence across income distribution of a simulated $0.22/gallon tax increase to that of a market-related price increase equal in size. The tax increase is clearly regressive, slightly more than the market-related price increase. However, regressivity is by no means a reason to give up gasoline taxes as an instrument for reducing gasoline consumption externalities. Their high effectiveness in reducing gasoline demand implies that small tax increases can substantially improve the environment while minimizing the related distributional effects. Also, gasoline taxes generate revenue that can be used to offset their regressivity.

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Authors and Affiliations

  1. Department of Economics and Statistics, University of Siena, Siena, Italy

    Silvia Tiezzi

  2. Florence School of Regulation Climate, European University Institute, Fiesole, Italy

    Stefano F. Verde

Authors
  1. Silvia Tiezzi
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  2. Stefano F. Verde
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Correspondence to Stefano F. Verde.

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Appendix

Appendix

Table 6 Distribution of observations across time (year and month of the interview)
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Table 7 Distribution of observations across PSUs (MSAs) and States
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Table 8 Price indices (1982-84 = 100) and gasoline excise taxes (sum of federal and State taxes)
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Table 9 Estimated QAIDS coefficients
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Table 10 Market Scenario: mean CVs ($/quarter), by income quintile and year
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Table 11 Tax Scenario: mean change in tax payments ($/quarter), by income quintile and year
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Table 12 Mean household disposable income ($/quarter), by income quintile and year
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Table 13 Mean household total expenditure ($/quarter), by income quintile and year
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Tiezzi, S., Verde, S.F. The signaling effect of gasoline taxes and its distributional implications. J Econ Inequal 17, 145–169 (2019). https://doi.org/10.1007/s10888-018-9397-7

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