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A Gas Tax Hike Might Not Clobber The Poor...

Economic Trends


Higher federal excise taxes on gasoline would seem to promise multiple benefits for the U. S. economy--reducing the budget deficit, encouraging conservation, and limiting both pollution and U. S. dependence on foreign oil. The problem for many opponents, however, is that such taxes are highly regressive in that they impose the heaviest burden on low-income households. Indeed, that's one reason Congress limited the gasoline tax hike it passed last fall to just 5~ per gallon, a paltry increase that left the average U. S. tax bite still less than one-fifth of that paid by motorists in Germany, Japan, France, and Britain.

Not everyone agrees that gasoline taxes are regressive, however. In a recent study, economist James M. Poterba of Massachusetts Institute of Technology argues that looking at gasoline outlays as a percent of annual incomes is a poor way to determine regressivity. A better guide to household well-being, he says, is how much households spend each year. And by that measure, his calculations indicate that gasoline taxes are not highly regressive at all.

Why emphasize spending levels rather than income levels? For one thing, income measures don't normally include in-kind benefits, such as food stamps and medicaid. For another, people tend to move in and out of different income classes depending on events, such as illness or unemployment, and on stages in their life cycles. Because spending levels reflect past and expected income streams, they are more representative of how well off people are over time.

Gasoline taxes based on income levels do appear highly regressive. Based on 1986 survey data, Poterba calculates that expenditures on gasoline as a percent of income are four times higher for the lowest 10% of households than for the top 20% and that shares of income devoted to gasoline decline steadily as one moves up the income ladder.

But expenditure levels tell another story (chart). The lowest 10% of households ranked by total expenditures spend about 3.9% of their outlays on gasoline, less than any other group. The heaviest burden of gasoline taxes appears to fall on middle-class households.

Poterba also notes that a gasoline tax hike would be reflected in the consumer price index and, thus, would have little impact on households whose incomes are indexed to inflation through transfer programs such as Social Security. "For the poor in inner cities who use public transportation," he says, "a tax increase will yield higher income with little offsetting change in the cost of living."GENE KORETZ

Steve Ballmer, Power Forward
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