Discussion Paper

How Much Should Highway Fuels Be Taxed?

Dec 30, 2009 | Ian W.H. Parry


This paper provides an updated assessment of economically efficient taxes on gasoline (used by light-duty vehicles) and diesel (used by heavy-duty trucks) to address various highway externalities in the United States. The (second-best) corrective fuel taxes are estimated, and we discuss the implications of fuel economy regulations and prospective (nationwide) controls on carbon emissions. We also examine how optimal fuel taxes depend on how they interact with the broader fiscal system. Our baseline estimates of the corrective taxes on gasoline and diesel are $1.23 and $1.15 per gallon, respectively. However, optimal fuel taxes can be substantially higher if extra revenues are used to reduce distortionary income taxes, or substantially lower if revenues are not used to enhance economic efficiency.