Question

All states impose excise taxes on gasoline. According to data from the Federal Highway Administration, the state of California imposes an excise tax of $\$ 0.40$ per gallon of gasoline. In 2013, gasoline sales in California totaled 18.4 billion gallons. What was California's tax revenue from the gasoline excise tax? If California doubled the excise tax, would tax revenue double? Why or why not?

Short answer

Explain your answer. Answer: No, doubling the excise tax on gasoline in California does not necessarily double the tax revenue. This is because the demand for gasoline could change due to the increased tax, which depends on factors like price elasticity, economic conditions, and alternative transportation options. Higher tax might lead to higher prices for consumers, which could result in lower consumption rates, or it may have no significant effect on consumption, depending on these factors.

Step-by-step solution

Calculate California's tax revenue from gasoline excise tax

To calculate the tax revenue, we will multiply the excise tax per gallon by the total gallons of gasoline sold in California. Excise tax per gallon = $0.40 Total gallons sold = 18.4 billion gallons Tax revenue = excise tax per gallon * total gallons sold Tax revenue = $0.40 * 18.4\text{ billion gallons}

Compute the tax revenue

Calculate the tax revenue: Tax revenue = $0.40 * 18.4\text{ billion gallons} = \$7.36\text{ billion} So, California's tax revenue from the gasoline excise tax was $7.36 billion.

Analyze if doubling the tax revenue would double the tax revenue

Doubling the excise tax would result in the new excise tax being: New excise tax per gallon = \(0.40 * 2 = \)0.80 However, we cannot assume that doubling the tax would double the revenue because it might affect the demand for gasoline. Increasing the tax could result in higher prices for consumers, which could lead to lower consumption rates. Alternatively, it may also not have a significant effect on consumption and thus double the tax revenue. The way demand for gasoline reacts to tax changes depends on various factors, such as price elasticity, economic conditions, and alternative transportation options. In summary, tax revenue from gasoline excise tax in California was $7.36 billion. Doubling the excise tax might not necessarily double the tax revenue, as the demand for gasoline could change due to the increased tax.