Gas Tax: Who Pays For It?
The impact of the higher gas tax as a percent of wages will be felt by poorest households, but the bigger chunk of tax bills will be paid by higher-income households
New Jersey recently introduced a 23-cent-per-gallon gasoline tax, making it the sixth most-expensive state for this tax. The legislators defended it as a way to fund road and transportation infrastructure, while opposing groups called it a further burden on the poor. True, excise taxes have traditionally impacted the poor more than the rich; however, with the gas tax we found the scenario was different because of contributing factors such as vehicle ownership and driving patterns.
Gasoline is one of the commodities whose demand is mostly inelastic in the long term — that is, price increases or decreases have only a miniscule effect on demand. So when the gas tax increases, consumption will stay flat and we will tend to pay a higher percent of wages towards gasoline — the impact will be especially higher for the poor as a percent of income.
Driving patterns in America show an interesting trend – those making less than $25,000 per annum tend to drive about 10,000 miles a year, while those making over $100,000 tend to drive about 20,000 miles, almost twice that of the lowest-income group (Figure 1). Vehicle ownership is lower for low-income categories, and this accessibility bottleneck results in lower annual miles. This partly offsets the impact of the gasoline tax for the poorest quintile households. The $0- to $25,000-income households (21 percent of New Jersey households) would end up contributing 14 percent to the total tax proceeds. Households with more than $100,000 income would pay 27 percent of this tax and account for approximately 20 percent of the total households (Figure 2). In fact, the income versus miles driven trend is also true globally — the U.S. is the leading country in terms of annual miles driven, at approximately 16,000 miles per person (Figure 3).
There are other benefits to increasing the gas tax now rather than in the future. Infrastructure projects need many years of foresight and planning, and a period of low gas prices makes the timing just right. It is also a good way to nudge a small number of us to convert to electric vehicles — the gas price alone won’t be sufficient for this but gives added incentive along with federal and state credits. Thus, while New Jersey has become the sixth most-expensive state in the nation in terms of the gas tax, the underlying reasons and timing are right, and a bigger chunk of the tax bills will come from the higher-income households, though their impact as a percent of wages would be felt in the lowest-income households.