If the gasoline tax is designed in such a way that it contributes to stabilizing the price of gasoline, more informed decisions concerning the purchase of fuel-efficient vehicles and the funding of mass transit might also be made. It is widely believed that the federal gasoline tax is unpopular with consumers and that increasing the tax will likely generate opposition. The tax raises revenue for highway construction and maintenance, which is directly related to automobile and gasoline use, suggesting that the tax can be viewed as a user charge. Excise taxes have been used to provide general, or dedicated, revenue and deficit reduction, but in some cases, for example, as in the taxes on liquor and cigarettes, there is some presumption that discouraging consumption, in addition to raising revenues, is a motivating factor in enacting the tax. After the oil embargo of 1973-1974, interest in the use of the gasoline tax as a policy instrument expanded to areas beyond highway financing. A number of tax provisions related to Highway Trust Fund financing are scheduled to expire on September 30, 2011. Changing Demand-Supply Relationships

The legal, or statutory, incidence of an excise tax on gasoline is on the refiner; however, the tax is typically passed on to the consumer, and is paid at the pump along with state and local taxes, leaving the economic incidence of the tax with the consumer. Economists have empirically estimated that in the short run, the sensitivity of the quantity demand of oil, and therefore, gasoline quantities, to price variations is low. On the revenue side, the federal gasoline tax, along with the corresponding tax on diesel fuel (24.4 cents per gallon) provided over $30 billion in revenue to the Highway Trust Fund in FY2008, and over $22 billion in the first three quarters of FY2011; however, the Highway Trust Fund, the financing of which depends on fuel excise taxes for about 90% of its funding, has recently been relatively unstable financially. In addition, because the existing federal tax is relatively small, compared to the price of gasoline, and is a declining portion of consumer income, as incomes rise, it likely is not having as large an effect in reducing consumption as it might have had when it was instituted. Since the federal gasoline tax is a fixed amount per gallon, and small relative to the price of gasoline, it does little to provide incentives to consumers to consider fuel-efficient vehicles. A variable gasoline tax would target a specific price of gasoline (including tax) that was thought by policy makers to achieve desirable levels of gasoline consumption and/or revenue production. The variable gasoline tax, set at a sufficiently high level to affect consumer decisions, could be expected to stimulate the demand for smaller, more fuel-efficient automobiles, spur the development of cars that use alternative energy sources, reduce U.S. oil imports and dependence on supplies from unstable parts of the world, reduce greenhouse gas emissions, and reduce the costs of maintaining the highway and road system, as well as likely reduce the number of accidents and fatalities. While U.S consumers have enjoyed low taxes on gasoline for some time, taxes in other industrialized nations make retail prices higher. This could be ameliorated if tax revenue were recycled back into the economy through increased infrastructure projects, or expenditures on alternative energy projects. If gasoline demand is extremely price inelastic, as discussed in this report, the magnitude of the effects on the refining industry would likely be proportionately small, especially if the gasoline tax was small. These goals might be attained through a renewal of, and possibly an increase in, the federal excise tax on gasoline.
American drivers, compared to those in industrialized nations in Europe, pay relatively low federal, state, and local gasoline and diesel excise taxes. The federal taxes are used specifically to fund annual highway construction, maintenance, and mass transit. Over the years, proposals have come forth to raise the federal tax as a way to address long-standing national policy concerns, including U.S. dependence on imported oil and various environmental problems related to large volumes of gasoline consumption. The current federal gasoline tax legislation is set to expire on September 30, 2011, and renewal of the tax could be controversial.
Policy attention on the role of the gasoline tax has also increased recently due to two major developments. First, the 2008 and 2011 oil and gasoline price run-ups and continuing effects of the economic downturn have periodically led to a decline in gasoline tax revenues available for needed highway construction and maintenance. Second, the volatility of gasoline prices has affected investment planning (e.g., for alternative fuels and vehicles) and arguably contributed to the troubles facing domestic automobile manufacturers. In the above context, this report outlines some of the macroeconomic and microeconomic pros and cons of using the federal gasoline excise tax for policy purposes in addition to the funding of highway infrastructure.
Whether an increase in the gasoline tax is fixed or variable, advocates argue that increasing the relative price of gasoline would promote beneficial short- and long-term changes in how we use this form of energy. A higher relative price would encourage consumers and manufacturers to move toward more fuel-efficient vehicles, or to switch to alternative fuels, thus reducing oil consumption and imports, reducing air pollution, and possibly encouraging greater use of mass transit. Advocates further argue that such taxes could be recycled back into the economy through changes in the tax structure and/or increased investment in renewable or alternative fuels, among other options.
Opponents of gasoline tax increases point to the effects on consumer and business spending, which affect the short- and long-term performance of the overall U.S. economy, especially in a time of needed economic recovery. Additionally, opponents point out that the gasoline tax has a regressive impact and affects rural areas disproportionately. Opponents also argue that such tax revenues could be better spent if left in the private sector.
Gasoline price increases due to market forces, or earlier tax increases, of course, have been part of the economic environment for almost four decades. Since the mid-1970s, there have been significant spikes in gasoline prices due to world oil market turmoil attributed to political conflict and war in the Middle East and to financial market speculation. Depending on the specified purpose of a new gasoline tax increase, it could be modest, or more significant. Because the demand for gasoline is quite price insensitive (inelastic), significant revenues could be generated with little change in real consumption, even with a relatively low tax increase. A more substantial tax increase would likely be needed to change consumer preferences and business investment decisions. Any debate on modifying the gasoline excise tax will likely revolve around these tensions.