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Is the gasoline tax regressive?

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"Is the gasoline tax regressive?"

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My last post argued “McCain reveals cynicism, hypocrisy with call for summer gas-tax holiday, energy budget freeze.” I received an e-mail whose basic thrust was “but everybody knows a gasoline tax is regressive, so how can progressives endorse it?” Well, as we will see, everybody doesn’t know a gasoline tax is regressive. In fact,

  • The poor are more likely not to buy any gasoline (i.e. not own a car at all)
  • Poor families own fewer cars (and much fewer of the fuel-inefficient SUVs and minivans), and
  • They walk and use mass transit more.

Maybe the best description of the situation is from a December 2003 study for the state of California:

A gas tax would be regressive only across upper-income groups, in this case only in the top half of the income distribution.”

Here is the data they present for the “Average Share of Income Spent on Gasoline in California, by Decile.” In the table, “Decile 1 is the poorest income group, and decile 10 is the richest.”

regress2.jpg

And this is not a new conclusion in the economic literature. As James Poterba, an economist for MIT and the National Bureau of Economic Research found back in 1991:

low-expenditure households devote a smaller share of their budget to gasoline than do their counterparts in the middle of the expenditure distribution.

Why is this the case? A 1997 study, “Daily Travel by Persons with Low Incomes,” that used data from the US Department of Transportation’s 1995 Nationwide Personal Transportation Survey (NPTS) found (see here):

  • A quarter (26 percent) of low income households do not have a car compared to only 4 percent of other households. [I'd be interested in seeing more recent statistics.]
  • People from low-income households are more likely to walk to work and are more likely to use public transit … to get to work.
  • People in low-income households are nearly twice as likely to walk for other than work activities as well…. For low-income single parent households, about 66 percent of trips are three miles or less.

A 2002 New Jersey Policy Perspective Report pointed out that that people were increasingly buying SUVs, pickup trucks and minivan, and “Most, if not all … are purchased by mid- to high-income households.” The EPA has found that such vehicles “burn 66 percent more fuel annually than passenger cars.” [You could also throw sports cars into the list of expensive, fuel-inefficient vehicles typically bought by wealthier households. ] The 2002 report cited but one example:

AutoPacific, a forecasting firm based in California, estimated that the median household income of the typical purchaser of a Lexus LX 470 is $250,000. The fuel usage of the LX 470, one of the heavier luxury sport utility vehicles, is less than 13 miles per gallon.

So the gasoline tax is regressive only across the top half of the income distribution. I stand by my critique:

Okay — let’s provide more tax relief to the American people, as progressives have been pushing hard to do. So why not cut income or payroll taxes or give the public a larger direct rebate — one that is linked to income so that the rich don’t get yet more money that should be going to middle class and poor. Cutting the gas tax will send a lot of money to the rich, and not bloody much money to the people who can’t afford a car, especially the urban poor. Who is out of touch?

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22 Responses to Is the gasoline tax regressive?

  1. Sam says:

    But Joe, won’t a gas tax will inevitably raise the cost of all types of goods and not just gas itself?

    It’s obvious why- trucks running on gas bring stuff to consumers.

    So prices of food, clothes, toilet paper, compact fluorescent lightbulbs, etc. will all rise too– and the poorer you are, the higher percentage of income you need to spend on these types things.

    So isn’t it about more than just the price of gas?

  2. Nick says:

    Completely agree, Joe.

    Also, note that people of lower economic status tend to car pool more as well.

    Seriously, the idea of a summer tax-free gasoline will only help those who can afford to pay higher gas prices to begin with. McCain’s trickle down theory will disproportionately help the American people.

  3. JMG says:

    Well done. I frequently find that liberals are the problem when you start talking about making cars pay their way; I have less problem convincing auto-loving conservatives that we should shift all the costs of driving onto the car owners (rather than, say, property owners through property taxation) than I do with liberals who profess a willingness to deal with our auto-slavery but then who, almost to a one, say “But what about the poooooor?”

  4. Joe says:

    Sam — that is a second order effect. All of energy is maybe 8% of GDP (maybe a tad more given the incredible recent run-up in prices).

    So let’s say the average product has an embedded energy cost of 10%, of which half is gasoline (which is probably high). Gasoline is now well over three dollars a gallon, and McCain wants to temporarily (for 3 months -1/4 of the year) cut the retail price of gasoline under 10%.

    End of the day, we’re cutting the cost of the average product maybe 0.1% at most. Yes, some products have a slightly higher embedded energy cost, but it is hard to see much “trickle down” for this too clever by half and too-cynical by 100% policy.

  5. Paul K says:

    My concern is for working families at or just below median income. It is clear from your chart that they are the hardest hit by gas taxes. In fact the broad middle class – decile 3 thru 7 is negatively impacted compared to both the poor and the wealthy. You also ignore the basis for judging taxes regressive which is the theory of the diminishing utility of the dollar. A dollar is much more valuable to a person who has 1,000 than to one who has a million.

  6. Sam says:

    I completely agree that this McCain plan is b.s.

    But I do think that we need to be aware of and have solutions to the natural regressivity of many of our climate solutions. This is a major challenge moving forward. Heading into an election, the climate solution (or D”s) people can’t be the ones advocating increased gas prices.

  7. JMG says:

    “Tax Waste, Not Work” — title of a book from Redefining Progress that’s at least a decade old.

    The best thing we can do for the poor also happens to be what the planet needs: a conversion from taxing the things we WANT from an economy (jobs, income, investment) to taxing the undesired effects of economic activity (consumption of non-renewable resources and emissions of pollutants, particularly toxins). Taxing income and investment is like driving with your foot jamming down on the brake even as your other foot is jamming on the accelerator, but that’s how we operate our tax system.

    By taxing primary energy upstream according to its carbon content and then taxing all mineral extractions and pollution permits, the costs are distributed fairly through the economy and the poor — who consume much less and are responsible for much less pollution and waste — pay a lot less in tax, which is shifted onto big consumers. Further, they no longer have to pay payroll taxes (social security), which start with dollar one, and there is no upper cap — the more you consume with your millions, the more tax you pay.

    If that is thought to require too much of a burden, then couple it with a Georgist land-value tax — that is, you tax only the land, not the improvements. (The value of land is socially created, so it taxes the value that society creates while encouraging full usage of developed land and discourages speculation.)

  8. Robert says:

    It’s far too late to start taxing gas heavily in the US. It should have started decades ago as it did in Europe and has encouraged a more compact and efficient society.

    Oil prices have been rising so fast since 2000 that any further tax seems pointless. If you want to tax anything, tax domestic fuel to encourage conservation and insulation. In the UK domestic gas and electricity is only taxed at 5% VAT instead of the usual 17.5%, whereas vehicle fuel is taxed at about 300%. From a climate change perspective this is ridiculous.

  9. Earl Killian says:

    I will second JMG’s recommendation of “Tax Waste, Not Work”. It is a thoughtful monograph. My memory of it is that it does a lot analysis on how to make waste taxes fair (i.e. not regressive). The summary and introduction (by Paul Krugman) may be found at:
    http://www.rprogress.org/publications/1997/TaxWaste_sum.pdf

  10. Robert says:

    Joe,

    “Gasoline is now well over three dollars a gallon” That is almost free – I have to pay over $8 a gallon in the UK.

    It does make me more than a little irritated to read this US-centric discussion – your per-capita carbon footprint is double that of the UK (and I think we are bad!), and it has risen substantially since Kyoto. You need to slash your fossil fuel consumption by at least half before you can even start to expect the likes of China to look to you for any sort of moral lead.

    It is the dark side of libertarian, democratic capitalism that no individual or group of individuals can slow down runaway consumption.

  11. Earl Killian says:

    Those who criticize proposals such as a gas tax as regressive need to consider the effects of doing nothing, which might hit the poor even harder than doing something to encourage efficiency and alternatives. The poor are often not buying new vehicles, but vehicles that were first bought by wealthier individuals. Incentives that cause new vehicle purchasers to make more efficient choices will end up helping the less wealthy used car buyers by changing the vehicles available.

  12. Earl Killian says:

    Robert, I generally agree, but I would like to point out that runaway consumption is perhaps only 5 decades old, so we don’t yet know whether we may still be able to do something about it. Some people are trying to make it an issue in the US. For example, see
    http://www.storyofstuff.com/
    with a video/animated lecture that tries to increase awareness.

  13. Paul K says:

    This thread illustrates that those who advocate carbon taxes sometimes forget we already have them. They are quite high in some places and as Robert says they are ineffective in climate terms. I thought it was agreed that cap & trade for and regulation of CO2 emissions is the way to achieve the desired carbon price. The purpose of all taxes first and foremost is to bring revenue to the government. Taxes can also be used to punish behavior. Tax waste, not work is a good working motto.

  14. Robert says:

    Paul – I think high tax on vehicle fuels in the EU zone during the many decades when oil was cheap has made us use it more efficiently. We have generally smaller, more efficient engines and a more compact infrastructure. However, we don’t tax other fuels in the same way (marine diesel, aviation fuel, agricultural fuel, domestic heating, electricity). This past strategy was to help our our balance of payments and is paying dividends now, but overall is not really making any difference to emissions. Also, in the UK traffic is limited mainly by congestion, which just shows how much we value petrol!

    The bottom line is that there is only so much crude oil in the world and it can only be produced at a limited rate, probably never exceeding 100 mbopd max. It will all get burnt as fast as it can be produced. As far as climate change goes it makes no difference who does it.

  15. Steve says:

    We can debate minor changes to taxes all day long, but until Americans can stomach punitive taxation, there’s point to thinking that we can be taxed to change our behaviors. We can barely get through increases in tobacco taxes, and that only effects 25% of the population. I don’t think we’ll ever see punitive taxation for waste in this country, at least not with the current prejudices Americans have towards taxes. We can’t even stomach to tax the obscenely wealthy a decent amount because we hold out the faintest hope that one day we’ll too be that rich. On a similar note, my favorite thing about these supposed flat taxes is that are based on the percentages that many people pay, after giving enormous sums to charity. Give them the flat tax, and watch the charity dry up!

  16. Robert says:

    Steve – exactly. Only it’s worse than that. If you tax tobacco heavily you really do kill off demand. If you tax fossil fuel it just makes it a bit cheaper and that bit easier for someone somewhere else on the planet to afford, so it gets converted to CO2 anyway. And even if you did somehow dampen demand globally, unless there is a plan to ultimately leave a proportion of the resource in the ground it’s all a waste of time anyway.

  17. Robert says:

    earl – yes, I watched http://www.storyofstuff.com/ when it was posted on http://www.energybulletin.net/ a few weeks ago. I tried showing it to other members of my family who are fully signed up members of the Church of Consumerism (unlike me, who detests the whole concept). They refused to watch it.

  18. Earl Killian says:

    Robert, that’s always the trouble: such pitches don’t reach the right audience. Only corporations have the money to do that. Another movement you might find interesting are the Compactors:
    http://groups.yahoo.com/group/thecompact/
    http://www.washingtonpost.com/wp-dyn/content/article/2006/12/17/AR2006121701122.html

  19. Earl Killian says:

    Paul K, yes there are small carbon taxes today, but there are also carbon subsidies.
    http://www.earthtrack.net/earthtrack/library/SubsidyReformOptions.pdf
    I cannot vouch for the accuracy of the above, but it wouldn’t surprise me if true.

    It cites an estimate of $49 to $100 billion dollars of energy subsidies in 2006. Most of these were for non-renewables. Imagine a world in which those dollars were directed at renewables instead!

    Cheney’s friends sure got a high return on investment for their subsidies of the Bush election campaign.

    Oil and gas got 52.4%
    Coal got 15%
    Total fossil was 66.2%
    Nuclear got 12.4%
    Ethanol got 7.6%
    Other renewables got 7.5%
    Conservation got 2.1%
    Other got 4.2%

    How backwards is that! Conservation should have gotten 50%. That would have made a larger difference in all of the others than the money they got.

  20. Rich says:

    Paul K’s first post gets this just right:

    My concern is for working families at or just below median income. It is clear from your chart that they are the hardest hit by gas taxes. In fact the broad middle class – decile 3 thru 7 is negatively impacted compared to both the poor and the wealthy. You also ignore the basis for judging taxes regressive which is the theory of the diminishing utility of the dollar. A dollar is much more valuable to a person who has 1,000 than to one who has a million.

    It’s particularly ironic to hear “they don’t own cars and walk” being given as a reason why the tax isn’t regressive — might they not be doing these things if they weren’t priced out because the costs are already to high relative to their other needs (shelter, food, etc.).

    Raising gas taxes is regressive by putting living the way the upper deciles do that much further out of reach for the poorest, and it puts even more of a squeeze on those who may not pay more as an absolute percentage of their income than those who are richer but for whom each dollar is more precious because of their scarcity (those at or just below the median).

    Regressive.

  21. Paul K says:

    Earl Killian,
    I completely agree there needs to be a reordering of subsidy priorities especially in the areas of transmission and grid development.

  22. Rod says:

    Are you misquoting the 2003 Dec study in California.

    Here’s what I get from it

    “The very poor do not
    own cars, and do not buy gasoline, so a tax on gasoline would not hurt the poorest
    families. The next income bracket includes working low-income families who tend to
    spend a relatively high fraction of income on gasoline. They would bear the brunt of a
    gas tax, while successive income brackets spend successively lower fractions of income
    on gas. Thus the gas tax is not regressive at the very poorest levels, but it is regressive
    across most of the rest of the income spectrum.”

    Doesn’t that say it’s regressive?