Policy Hub

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Summary:

Automobile manufacturers and even some states have ambitious goals to phase out gas-powered cars. Currently, a primary source of automobile infrastructure funding is gasoline taxes. But as electric vehicles replace gasoline-powered cars, less gasoline will be purchased and revenues from the gasoline tax will fall short of what is needed to maintain roads. Consumers who do not purchase electric vehicles—perhaps because they can't afford them—are left to bear the burden of the gasoline tax. This Policy Hub article illustrates the inherent regressivity of the gasoline tax and then simulates the distributional impact of replacing the current gas tax with a lump-sum tax with different assessment rules designed to replace revenue generated by the gasoline tax. For example, many states are considering switching from a gas tax to a tax based on miles driven to shore up infrastructure funding. Alternatively, the required revenue could be paid based on income. Not surprisingly, the degree of regressivity of replacing the gasoline tax depends on how the tax is assessed across the income distribution.

Key findings:

1. The gasoline excise tax is highly regressive.
2. Gasoline tax revenues are falling due to the increased use of electric vehicles.
3. Replacing the gasoline tax with a lump-sum tax improves the welfare of all consumers.
4. How a lump-sum tax is assessed may be more or less regressive than a gasoline tax.
5. Replacing the gasoline tax with a tax on miles driven may be most equitable across income.

Center Affiliation: Center for Human Capital Studies

JEL classification: H22, Q21, D11

Key words: gas tax, equity, incidence, consumer demand system, income distribution

https://doi.org/10.29338/ph2023-4