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.

Key concepts

Gasoline Demand

Gasoline demand refers to the amount of gasoline that consumers are willing and able to purchase at a given price. In simple terms, it's how much people want gas when the price is set to a certain level. When the excise tax on gasoline increases, the price at the pump might also rise. This, in turn, can influence the demand for gasoline. If the price goes up, people might start looking for alternative transportation like biking or carpooling.
It’s important to remember that gasoline demand is not only determined by price. Other factors such as income levels, geographic area, and availability of public transportation also play critical roles. In areas where cars are the primary mode of transportation, gasoline demand might be less sensitive to price changes. People still need to drive to work or run daily errands, regardless of the price hike.
Thus, understanding the nuances of gasoline demand is crucial when considering the effects of increasing excise taxes. It's not a straightforward calculation because human behavior, especially around essential commodities like fuel, is complex.

Tax Revenue

Tax revenue generated from gasoline excise taxes comes from multiplying the tax rate by the volume of gallons sold. In California, for example, a tax of $0.40 per gallon yielded $7.36 billion in revenue. This calculation is straightforward as long as the demand remains constant.
But thinking about whether doubling the tax rate would double the revenue requires deeper consideration. In theory, if demand for gasoline remains stable, revenue might double. However, as we saw, demand is likely to shift when prices rise. If people buy less gasoline due to a higher tax, the actual revenue may not increase as anticipated.

• Initially: Revenue = $0.40 (tax) × 18.4 billion gallons = $7.36 billion
• If tax doubles: $0.80 (tax) × (quantity sold likely less than 18.4 billion gallons)

Therefore, actual tax revenue depends heavily on how sensitive consumers are to the change in gasoline prices. Policymakers need to be careful and consider elasticity to predict tax outcomes.

Price Elasticity

Price elasticity of demand measures how sensitive the quantity demanded is to a change in price. It tells us how much the demand for gasoline will change when the price increases due to a higher excise tax. Mathematically, price elasticity of demand is calculated as:\[\text{Elasticity} = \frac{\text{Percentage change in quantity demanded}}{\text{Percentage change in price}}\]
Gasoline typically has inelastic demand, meaning that people's gas-buying habits don't change dramatically with price increases. This can be because gasoline is a necessity for many, limiting their ability to reduce consumption. But even inelastic goods have some elasticity.
When considering whether to double excise taxes, understanding elasticity helps address how pricing changes might affect demand and revenue. If elasticity is low, higher prices won't reduce gasoline purchases much; revenue increases will be closer to double. However, with higher elasticity, the impact on demand could significantly reduce potential revenue gains.
Policymakers use elasticity to gauge the likely effects of tax adjustments, making it a vital concept for predicting economic behavior when excise taxes change.