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Gasoline taxes and revenue volatility: An application to California

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  • Madowitz, M.
  • Novan, K.

Abstract

This paper examines how applying different combinations of excise and sales taxes on motor fuels impact the volatility of retail fuel prices and tax revenues. Two features of gasoline and diesel markets make the choice of tax mechanism a unique problem. First, prices are very volatile. Second, demand for motor fuels is extremely inelastic. As a result, fuel expenditures vary substantially over time. Tying state revenues to these expenditures, as is the case with a sales tax, results in a volatile stream of revenue which imposes real costs on agents in an economy. On July 1, 2010, California enacted Assembly Bill x8-6, the “Gas Tax Swap”, increasing the excise tax and decreasing the sales tax on gasoline purchases. While the initial motivation behind the revenue neutral swap was to provide the state with greater flexibility within its budget, we highlight that this change has two potentially overlooked benefits; it reduces retail fuel price volatility and tax revenue volatility. Simulating the monthly fuel prices and tax revenues under alternative tax policies, we quantify the potential reductions in revenue volatility. The results reveal that greater benefits can be achieved by going beyond the tax swap and eliminating the gasoline sales tax entirely.

Suggested Citation

  • Madowitz, M. & Novan, K., 2013. "Gasoline taxes and revenue volatility: An application to California," Energy Policy, Elsevier, vol. 59(C), pages 663-673.
  • Handle: RePEc:eee:enepol:v:59:y:2013:i:c:p:663-673
    DOI: 10.1016/j.enpol.2013.04.018
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    2. Can Chen & Whitney B. Afonso, 2021. "The Adoption of Local Option Fuel Taxes: Evidence From Florida Counties," Public Budgeting & Finance, Wiley Blackwell, vol. 41(1), pages 51-75, March.
    3. Li, Yangfan & Zhang, Xiaoyun, 2023. "Recycling scheme of carbon pricing for inclusive decarbonization and energy transition: A recursive computable general equilibrium analysis in China," Renewable Energy, Elsevier, vol. 217(C).
    4. Aboura, Sofiane & Chevallier, Julien, 2017. "Oil vs. gasoline: The dark side of volatility and taxation," Research in International Business and Finance, Elsevier, vol. 39(PB), pages 976-989.
    5. Wittmann, Nadine, 2014. "Regulating gasoline retail markets: The case of Germany," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 8, pages 1-33.

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