Taxing gasoline: How consumer behavior is affected

Oil producing countries may exercise profound influence over American driving habits, but a new Harvard Kennedy School faculty research paper shows the U.S. federal and state taxes also play an important role.

“Gasoline Taxes and Consumer Behavior” finds that even small changes in gasoline taxes affect consumer behavior and that taxes affect behavior even more than commensurate increases in cost caused by rising oil prices.

The paper is co-authored by Shanjun Li, Cornell University; Joshua Linn, Resources for the Future; and Erich Muehlegger, associate professor of public policy at Harvard Kennedy School.

The researchers specifically analyzed the short-run impacts of gasoline taxes on driver decisions – gasoline consumption, vehicle miles traveled and vehicle choices – and the ways in which those impacts differ from those incited by changes in the price of gasoline exclusive of the tax.

“The purpose of our paper is to test the maintained assumption that consumers respond to gasoline tax and tax-exclusive price changes in the same way,” write the authors. “Our analysis directly estimates consumer responses to gasoline taxes by decomposing retail gasoline prices into tax and tax-exclusive components.”