Report Taxes
March 18, 2004 6 min read
Authors: Rea Hederman and Alfredo Goyburu
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Some leaders inCongress want to increase the federal tax on gasoline by 5.45 centsper gallon, for the first year, and then index it to inflation.They would use the revenue from this tax increase to financeadditional spending on highways and other transportation projects,which they say will benefit the economy. Macroeconomic analysisperformed by the Center for Data Analysis at the HeritageFoundation, however,shows that increasing the gas tax woulddepress economic activity and the incomes of millions of Americans.It would also raise significantly less revenue than its proponentsproject. The President should be commended for his firm standagainst raising the federal gasoline tax, and Congress would dowell to abandon proposals to increase the gas tax and instead focuson spending highway dollars more efficiently, ideally by turningthem back to the states.[1]
Analysts in theCenter for Data Analysis (CDA) estimated the economic and fiscaleffects of a higher gas tax using a well-known econometric model ofthe U.S. economy.[2]The model allows analysts to vary the gas tax and simulate theeffects of higher spending on infrastructure construction, ifadequate details about that construction are available. Becausesuch details were not available, CDA analysts instead used theadditional revenues from the higher gas tax to pay down nationaldebt, which is an alternative way of infusing government spendinginto a segment of the economy that is tightly aligned withinvestment decisions. [3]
This macroeconomicanalysis found that:
- Personal savingswould average $8 billion less per year from 2005 to 2014.
- $82 billion ofthe $131 billion increase in federal revenues over 10 years wouldbe financed out of foregone or lower personal savings.
- Gross DomesticProduct would decline by $6.5 billion per year, in real terms, from2005 to 2014. In other words, this $131 billion in governmentrevenues would shrink the economy by $65.5 billion.
- There would be,on average, 37,000 fewer job opportunities each year. That worksout to one lost job for every $351,000 in new taxes, which is equalto 11 years of work at average yearly wages.[4]
- Total federalrevenues would fall short of gas tax proponent's projections by$3.7 billion.
- Family disposableincome would be, on average, $2.5 billion less per year, in realterms. That's equivalent to the cost of sending 532,600 students tocollege each year. [5]
Congressman Don Young(R-AK) proposed an increase of the federal gas tax from 18.4 centsper gallon to 23.85 cents per gallon in the first year as part ofthe 2004 highway bill. While this twenty-nine percent tax increasehas not generated major support, Congress should not bring the gastax increase back as a policy proposal. While raising the gas taxwould increase government revenues, it would only do so at theexpense of economic growth, jobs, and family income.
Some of thesenegative effects are due to Americans' mobility needs. Academicresearch on the relationship between the gasoline tax and demandfor gasoline indicates that gasoline consumption would not decreasesignificantly in the short run if the tax were increased.[6] For every one percentincrease in the gasoline price, usage would decline by .26 percentin the short run and .86 percent in the long run. In other words,consumers are willing to make other sacrifices instead of drivingless. On average, an increased gas tax would cost families whodrive $54 per year, which would come out of savings and consumerspending.
This table shows how much more consumers in each state wouldpay for gasoline if Congress were to increase the gasoline tax asproposed.
CDA Analysts usedthe Global Insight, Inc. (GII) macroeconomic forecasting model toidentify, the economic and fiscal effects of the potential gas taxhike by increasing only the federal gas tax variable in the model.The federal gas tax was increased by 5.45 cents in the GII modelfor calendar year 2005, and was indexed to inflation for the nextfive years. The model showed that many key economic indicators,including savings, disposable income, and GDP, would experienceslower growth due to the tax increase. The decline in nominalprivate savings would total over $82 billion between 2005-2014.This means that the average American family would save $100 lesseach year because of higher gas prices.[7]
Instead of raisingrevenue for additional spending-which would negatively affect alllevels of the economy-Congress should make current transportationspending more efficient. By eliminating wasteful programs andstreamlining other transportation projects such as Amtrak, Congresscould make better use of the taxpayers' money and free up funds fornew projects that it deems essential. Another option would be touse temporary tolls on federal highways to pay for specificprojects. The best option, though, would be for Congress to "turnback" highway maintenance and funding to the states, which arebetter placed to assess local transportation needs.
[1] Utt, Ron, "Yes, Mr.President, Veto the Highway Bill," Heritage Foundation BackgrounderNo. 1725, February 13, 2004, available at http://www.heritage.org/Research/SmartGrowth/bg1725.cfm.
[2]CDA used the GlobalInsight, Inc., U.S. Macroeconomic Model to conduct this analysis.The methodologies, assumptions, conclusions, and opinions in thisreport are entirely the work of Heritage Foundation analysts. Theyhave not been endorsed by and do not necessarily reflect the viewsof the owners of the model.
[3] The additional revenuesstemming from the increased gas tax are used in the GII model topay down debt. That is, revenues above baseline expenditures inthis model are assumed to reduce total federal debt unless theusers of the model explicitly assume otherwise. Debt reductionincreases the income of debt holders, which results in increasedinvestment and consumption. CDA analysts could have assumed thatincreased outlays would positively affect economic performance byenhancing private sector income and private employment. However,that assumption would have required relatively greater detailedknowledge about the mix between the expansion of existingconstruction projects where the income and employment elasticitiesare very low and the initiation of new projects requiringsignificant reallocation of resources and labor, where elasticitieswould be higher. Such details are not available. Thus, the prudentapproach is to allow the increased revenues to flow proportionallyto capital and labor, and to investment and consumption, throughoutthe economy through the modeling simplification of debtrepayment.
[4] U.S. Department ofLabor, Bureau of Labor Statistics, National Compensation Survey:Occupational Wages in the United States, July 2002 (BLSBulletin 2561: September, 2003): Table 1-1.
[5] According to TheCollege Board, the average cost of tuition and fees at a four-yearpublic college for the 2003-2004 academic year was $4,694. See TheCollege Board, Trends in College Pricing 2003, available athttp://www.collegeboard.com/prod_downloads/press/cost03/ cb_trends_pricing_2003.pdf.
[6] Dahl, Carol andSterner, Thomas "Analyzing Gasoline Demand Elasticities: A Survey,"Energy Economics (July 1991).
Authors
Rea Hederman
Executive Director, Economic Research Center
Alfredo Goyburu
Policy Analyst, Transportation and Infrastructure
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