By Danni Chen
In contrast to earlier this year, November has seen consecutive days of falling oil prices. This drop has led to lower costs for consumers at the pump. With the annual growth rate of investment in public infrastructure slowing, some have suggested that now is the time to increase the federal gas tax. Recently, a former Secretary of Transportation urged the Administration to seize the opportunity to raise the gas tax. In the past, President Trump has endorsed an increase of 25 cents per gallon. The last increase in the federal gas tax was a quarter century ago in 1993 to 18.4 cents per gallon.
Here, PWBM estimates the amount of additional revenue that is gained by increasing the gas tax by 25 cents per gallon. To estimate the impact of a larger gas tax on revenue, we use the Energy Information Agency’s (EIA) forecast of both retail gasoline price and gasoline consumption. We then adjust gasoline consumption in response to the increased after-tax price of gasoline based on elasticity estimates from the literature.1
The red line in Figure 1 is the forecasted retail gasoline price inclusive of all state and federal taxes, including the proposed 25 cents per gallon increase. Under current law, the federal gas tax is projected to raise an average of $23.7 billion per year from 2018 to 20282 and is represented by the dark blue area. The downward slope of the revenue area reflects forecasted changes to gas consumption due to both changes in the fuel efficiency of automobiles and gas price increases. We forecast the additional 25 cents per gallon tax will raise an additional $31.8 billion per year on average. With the increase, the federal gas tax will generate a total of $55.5 billion per year in average revenue, or $549 billion over the standard 10-year budget window.
We use estimated elasticities from Coyle, David, Jason DeBacker, and Richard Prisinzano. “Estimating the Supply and Demand of Gasoline Using Tax Data.” Energy Economics 34, no. 1 (January 1, 2012): 195–200. In applying these elasticities, we assume that retailers pass the entire tax to consumers, which is a standard assumption consistent with the intense price competition in this market. ↩
,Retail gasoline price with new tax,Additional revenue from new tax,Current law revenue,Total revenue with new tax 2018,2.845559338,35.13231758,26.16362062,61.2959382 2019,3.205133833,35.00415331,26.03066284,61.03481615 2020,3.381996394,34.52897263,25.66224464,60.19121727 2021,3.459397884,33.76589255,25.08918994,58.85508249 2022,3.517850523,32.93899893,24.47059732,57.40959626 2023,3.587638583,32.01225622,23.77744871,55.78970493 2024,3.581510915,31.02348398,23.04341679,54.06690077 2025,3.580728851,30.04015872,22.31307722,52.35323594 2026,3.601604291,29.26255612,21.73424739,50.99680351 2027,3.630266061,28.57275715,21.22026551,49.79302267 2028,3.665990101,27.96535324,20.76719235,48.7325456