Study Finds Gas Tax Much More Cost-Effective Than Fuel Economy Standards

Policymakers are consistently debating ways to ease the burden of high fuel costs, but new research suggests that higher gasoline taxes may actually save money in the effort to reduce our dependence on foreign oil and address climate change.  In a recent study published in the journal Energy Economics, a group of researchers at MIT compared the total economic effects of two policies for reducing gasoline consumption: 1) fuel economy standards and 2) gasoline taxes.  The study, which was led by Dr. Valerie Karplus, sought to determine how much it would cost under each policy to reduce gasoline consumption twenty percent by 2050.  The researchers concluded that higher gasoline taxes are between six and fourteen times more cost-effective than fuel economy standards.

According to the study, gasoline taxes are more cost-effective because they work in a number of different ways.  First, unlike fuel economy standards, which only apply to new vehicles and are increased incrementally over the next few decades, gasoline taxes apply right away to the 230 million vehicles already on the road.  Second, higher gasoline taxes discourage driving by making it more expensive.  As a result of the higher gas prices, drivers may purchase more efficient vehicles (thus achieving the same effect as mandatory fuel economy standards), increase carpooling and public transportation, or explore biofuels or electric vehicles, which are made more competitive as gas prices increase.  In contrast, higher fuel economy standards alone actually encourage more driving by making it cheaper, which can negate much of the gasoline saved through increased efficiency.  Furthermore, gasoline taxes generate steady revenue that can be used to fund infrastructure and transportation projects, whereas the costs of regulating fuel economy standards generally divert money away from these areas.

The findings of this study can be confirmed by looking at Europe, where gasoline taxes and overall fuel costs are significantly higher, than in the United States.  Because of these higher prices, European drivers tend to choose more fuel-efficient vehicles and drive less than their American counterparts.  As a result, fuel-efficiency rates are much higher than in the United States.

Despite the economic and environmental appeal of increasing the gasoline taxes, United States policymakers generally avoid this policy.  This is especially true now, with gasoline averaging about $3.80 a gallon, including roughly fifty cents in taxes.  Despite the higher costs associated with fuel economy standards, these costs are hidden and only really considered when buying a new vehicle, whereas gasoline taxes are highly visible on a much more frequent basis.  Because of this, the public is strongly opposed to higher gasoline taxes but generally supports fuel economy standards.  As a result, policymakers, especially at the federal level, generally believe fuel economy standards are the best that can be done.

Although the gasoline tax is not given much consideration at the federal level, it has recently become an issue for several states.  For example, instead of increasing its gasoline tax to keep pace with inflation, the Virginia legislature recently reached a deal to eliminate its gasoline tax and replace it with increased sales taxes as well as fees for purchasing hybrid or electric vehicles. Governor Corbett of Pennsylvania is proposing a similar measure. On the other hand, several states, including Maryland, New Hampshire, Massachusetts, and Washington, are now considering increasing their gasoline taxes to help fund infrastructure projects.  These proposals have quickly drawn criticism, and it is unclear whether any of these efforts will be successful.  However, perhaps this study and the attention it has garnered will influence these states and begin to change the politics of the gasoline tax.

Written by Robert J. Van Auken, GIELR staff