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How Much Should Highway Fuels Be Taxed?

Jan 6, 2010

How Much Should Highway Fuels Be Taxed?
RFF Feature
January 6, 2010

Gasoline consumption on the nation’s roads and highways account for one-fifth of U.S. carbon emissions. Meanwhile, traffic congestion continues to worsen and fatal vehicle accidents kill 40,000 people annually. Such conditions suggest that imposing higher taxes on highway fuels could have positive consequences – and would bring the United States more in line with policies of many European countries that tax gasoline more heavily.

In a new paper, “How Much Should Highway Fuels Be Taxed?Ian W.H. Parry, the Allen Kneese Chair and RFF Senior Fellow, puts the economically efficient level of taxation at $1.23 per gallon for gasoline and $1.15 per gallon for  diesel fuel. However, the paper also warns that the case for higher taxes can be greatly undermined if revenues are not used to enhance economic efficiency.

Excerpts from the Paper

Ian W.H. Parry

“There appears to be a strong efficiency case for substantially increasing taxes on highway fuels – to more than $1/gallon – at least for the foreseeable future, before other (more efficient) policies to largely internalize mileage-related externalities (e.g., peak-period road pricing) are widely implemented. This presumes efficient use of additional fuel tax revenues.”

 “Substantially higher fuel taxes appear to have little political traction at present, though it is not difficult to think of examples of policy reforms that, at some earlier date, seemed impossible to implement (e.g., industry deregulation or the use of market-based instruments for pollution control). At any rate, the economist’s role is to inform policymakers about the potential net benefits from overcoming obstacles to more efficient policy.”

In a recent RFF Weekly Policy Commentary, economist Kenneth Small also opines that current economic and political realities provide an opportune time to increase taxes on gasoline.