CRS REPORT LOOKS AT HISTORY OF GASOLINE TAXES.

                          GASOLINE DEMAND,

Increasing taxation on motor gasoline has been a topic of legislative interest for two decades, during which time Congress has twice enacted five cent per gallon increases. Renewed calls for higher motor gasoline taxes are heard in 1993. Current interest is fueled by a search for Treasury revenue, concerns about oil imports, and environmental considerations related to autos as a pollution source.

A program to conserve gasoline was put in place as part of the Energy Policy and Conservation Act of 1975, which established Corporate Average Fuel Economy (CAFE) standards. CAFE's goal was to ensure that the average car sold in the United States achieved a 27.5 miles per gallon standard by the mid-1980s. This goal has been met for new cars. But national gasoline consumption remains stable, in part because new car sales have not kept pace with the increase in number of vehicles on the nation's highways. The on-the-road vehicle fleet has aged from 5.7 years to an average of 7.9 years. The result is that while new cars are quite fuel efficient -- they are a smaller portion of the mix than at any time since World War II.

Other practical factors have inhibited reductions of gasoline consumption. There are many more licensed drivers driving more registered vehicles more miles per vehicle. And the pump price of gasoline -- measured in real dollars has declined to its lowest level in history. This -- combined with increasing mpg for the average vehicle on the road -- has lowered the real fuel cost of driving markedly. Under current circumstances, there is little price incentive to conserve gasoline. It is notable that CAFE has contributed to this by increasing fuel efficiency and lowering the cost of a mile driven.

Proposals to reverse this situation center on increasing the perceived price of motor fuel via a tax, as well as increasing the CAFE standard. Gasoline tax proponents assert that this would alter a number of trends that have caused gasoline consumption to be greater than hoped for. (See Gasoline Excise Tax: Economic Impacts of an Increase, CRS Issue Brief 93028, Feb. 4, 1993.) Further, higher fuel costs would make new cars more attractive and create incentives to retire older, less efficient vehicles from the fleet. By bringing more vehicles that meet current CAFE standards into the fleet, overall fuel efficiency would be improved, and all else unchanged, gasoline demand reduced.

Those interested in generating revenues for the Treasury note that a gasoline tax is a potent money raiser. Every penny per gallon of gasoline tax generates $1 billion per year. On the downside, gasoline taxes have certain unwanted characteristics, including non- neutral regional and distributional impacts. Most economists view such imposts as less efficient than income taxes. Additionally, the benefits of CAFE will eventually accrue without a gas tax as less efficient vehicles age to the point where they can no longer be kept on the road. A gas tax would make this happen sooner by raising the cost of keeping inefficient vehicles in service -- but sooner or later it will happen anyway.

                              CONTENTS

U.S. consumption of gasoline -- an amount roughly equal to current domestic crude oil production -- has been a continuing concern for both energy and environmental policy makers. Following the 1973 Arab Oil Embargo Congress set an escalating scale of fuel economy standards, applicable to the average of an auto manufacturer's output. Corporate Average Fuel Economy Standards (CAFE), set in 1975 by the Energy Policy and Conservation Act, mandated that domestically manufactured automobiles achieve an average 27.5 miles per gallon (mpg) by 1985.

The promise of gasoline demand reduction -- and a commensurate reduction in the amount of crude oil imported -- was large. At the time of EPCA's enactment, the average car on the road got only 13 mpg. The mileage standard seemingly promised -- when fully phased in and allowing time for the public to purchase the fuel efficient new cars -- to substantially reduce consumption. A doubling of fuel economy could hypothetically translate into a reduction in petroleum demand of about 3.5 million barrels per day (mbd). This is the equivalent of half the nation's oil imports.

But a number of factors counteracted the impact of the CAFE phase-in, (which itself was slowed down by the Department of Transportation). Some of the important developments were:

o A decline in real gasoline prices: the inflation-adjusted cost of gasoline fell by almost 10 percent between 1973 and 1992. During intervening years, gasoline prices peaked in 1980 at $2.08 per gallon (in 1992 dollars) and declined steadily to $1.19 at the end of 1992. The effect of declining real gasoline prices was amplified by increasing mpg, which effectively lowered the incremental cost of driving. It is not surprising that motorists are driving more miles per vehicle.

o Between 1972 and 1992, more licensed drivers and other demographic factors led to a 59 percent increase in the total number of registered vehicles.

o The fleet of vehicles on the road has aged. Motorists are not buying new cars at the same rate as in decades gone by, and they are keeping cars on the road longer. The average vehicle age has risen from 5.7 years to 7.9 years. Of greater importance is the fact that vehicles over 10 years old now constitute 30 percent of those on the road, up from 11 percent in 1973. Fuel efficient cars are not entering the fleet as fast as was hoped, and older, less efficient vehicles are not being retired as early. As a result, CAFE's full benefits -- in terms of reducing gasoline consumption -- are not being realized.

There is renewed interest in U.S. gasoline consumption. In the 102nd Congress, debate over increased CAFE standards deadlocked the Energy Policy Act until it was removed from the legislation. More recently calls for an energy tax -- one variant of which is a gasoline tax -- for energy conservation and environmental policy have been heard. (Such imposts can be powerful revenue raisers for the Treasury, certainly a key fact.) Internationally, critics of U. S. energy and environmental policy contrast our gasoline prices with the $3.00 to $4.00 per gallon, most of it taxes, paid in most other industrialized nations.

Beyond concerns about Federal revenues and foreign critics, CAFE standards have not yet delivered their full expected benefit. Benefits might be delayed further because of the factors described above and elaborated on below. A gasoline tax might be seen as a necessary supplement to existing or stricter CAFE. This could change the economics of keeping older, less fuel efficient cars on the road in favor of buying new vehicles that get better mileage.

A tax large enough to change the overall economics of vehicle usage would also generate significant government revenues. A useful and reasonably accurate rule of thumb is that every cent of gasoline tax results in $1 billion of revenue collection. Taxes as high as 50 cents per gallon have been discussed. Under such a scenario, revenue collections could be quite large. But this must be viewed in the context that the economy as a whole would react to such an impost in much the same manner as it would react to other types of tax hikes. Responsive economic forces would lower overall economic activity, somewhat reducing national income and Treasury revenue flows from taxes on incomes.

BACKGROUND

Proposals to achieve broad scale petroleum demand cutbacks have not had enough support to become policy. Ambivalence toward reducing U. S. oil imports may be attributed to the continually growing supply of proven oil reserves globally, albeit not in the United States. Between 1980 and 1990, global reserves rose from 600 billion barrels (bbls) to 1.0 trillion bbls, an increase of nearly 70 percent. It is, therefore, difficult to make a convincing case that the world is running out of oil, although reserves in the United States are declining and domestic production is falling at a rate that causes alarm. Nevertheless, oil continues to be discovered abroad, in places where regional and national political stability (as well as the outflow of cash and its impact on the economy) cause policymakers concern.

Perhaps the more genuine policy concern about oil imports centers on the balance-of-payments cost of foreign oil, amounting to about $50 billion at current volumes and prices. Some view this large amount of money leaving the domestic economy as a barrier to much- desired growth. But would the proposed remedies be worse than the illness? The trade-off between the adverse economic impacts which might stem from measures to reduce the oil import bill and the beneficial effect of import reduction is difficult to estimate, with no guarantee of a positive outcome.

Many oil import reduction concepts focus on gasoline, which comprises 42 percent of domestic oil demand. There seems to be a fairly pervasive belief that the U. S. consumes "too much" gasoline, and that this is wasteful. Environmentalists claim certain environmental benefits could be realized by reduced gasoline consumption, an added benefit to consumption reduction proposals.

Indeed, the United States uses one-third of the world's oil (excluding Eastern Europe and the former Soviet Union), and nearly half its gasoline. Often asserted is the view that our pattern of consumption, and policy of very low gasoline taxes, is out of step with the rest of the world.

Additionally, gasoline is heavily taxed elsewhere. A combination of specific levies and value added tax are common in most industrialized countries, and pump prices in the $3.50 per gallon area are typical in Europe. High consumption and relatively low prices in the United States are features that stand out in international comparisons of economic structure, and are often cited by foreign critics of U.S. energy and environmental policy.

GASOLINE CONSUMPTION -- HISTORIC VIEW

Figure 1 shows the trend in gasoline demand since the 1973 Embargo. Demand grew steadily in the immediately ensuing years, peaking at 7.4 mbd in 1978. It fell during the market turmoil associated with the Iranian political upheaval in 1979, and continued its decline though much of the 1980s. Early in the decade, high crude prices and a weak economy, coupled with the phase-in of CAFE standards, likely contributed to essentially flat demand. Growth began again in 1987 and reached 7.3 mbd in 1992, almost duplicating the highest ever consumption of 15 years earlier.

Gasoline consumption has grown only modestly since the Arab Oil Embargo, which took place 20 years ago. This small growth was remarkable, since it took place in the face of factors -- discussed in more detail below -- that should have stimulated much greater growth. These included:

o a substantial decline in real fuel prices;

o substantial growth in the number of vehicles in use;

o an 18 percent gain in miles traveled per vehicle.

o the aging of the fleet of vehicles in use, keeping less fuel- efficient vehicles in service longer.

GASOLINE DEMAND (1973 - 1992)

[graph omitted]

GASOLINE PRICES

Gasoline prices are shown in Figure 2, which displays data in real 1992 dollars and in nominal dollars. This graph conveys a great deal of information that is worth commenting upon. Real gasoline prices declined persistently after World War II, and continued to fall until just before the 1973 Arab Oil Embargo. Between 1973 and 1982 -- when world oil markets settled down after the Iranian political upheaval -- real prices rose, peaking at the 1992 dollar equivalent of $2.10 per gallon. Thereafter, gasoline prices trended downward, declining in real dollar terms by 50 percent.

U.S. GASOLINE PRICES FROM 1918 TO THE PRESENT (1992 $)

[graph omitted]

Figure 2 also illustrates the startling fact that -- in real dollar terms -- the current price of gasoline is virtually the cheapest it has been in the motor vehicle era. These data include increases in state and Federal taxes, as well as the cost of recent qualitative improvements such as the removal of lead from gasoline, volatility limits, and the recent oxygen content up-grade.

The fact that U.S. gasoline is cheaper than it has ever been is not widely perceived at home. It is, however, widely noted abroad and has become the focal point of foreign criticism of U.S. energy and environmental policy. Barbs directed from abroad dwell on U.S. consumption of a lion's share of gasoline and a low taxation policy, sharply juxtaposed against that of other industrialized countries. Figure 3 shows gasoline prices in several major countries. Wholesale gasoline prices are about equal worldwide, so differences at the pump are chiefly due to taxation.

GASOLINE PRICE COMPARISONS (U.S. dollars per gallon)

[graph omitted]

THE REAL FUEL COST OF DRIVING

Low real gasoline prices and mpg improvements have combined to make the real fuel cost of driving lower than it has ever been. Figure 4 shows the real fuel cost of driving a mile in a "typical" car -- the average car on the road -- and a new car. Declining real gasoline prices and higher mpg result in 1992 fuel cost per new vehicle mile of about 4 cents. New car fuel cost has fallen by half since its 1980 high. The average vehicle on the road -- burning less than 6 cents per mile in fuel -- has experienced a larger decrease, a drop of almost 60 percent.

The data in Figure 4 show that the TRUE fuel cost of driving -- adjusted for the combined effects of inflation and improved fuel efficiency -- has declined greatly over time. To the extent that driving has become cheaper, the incentive to use automobiles (and consume gasoline) has increased by a factor which is even greater than the decline in real fuel cost.

REAL FUEL COST OF DRIVING (1992 $)

[graph omitted]

NUMBER OF VEHICLES ON THE ROAD

During the past two decades the number of cars, trucks and buses on the road has increased 76 percent, rising from 108.4 million in 1970 to 190.7 million in 1991. Remarkably, this huge increase in vehicles has not been accompanied by a proportionate increase in fuel consumption. If fuel consumption had increased on a one-for-one basis with the rise in vehicle population, the resulting higher demand for crude oil -- as much as 5 mbd -- would have led to a world crude oil market with a completely different price profile than exists today.

An important factor in reducing the transportation sector's appetite for oil is the average miles per gallon obtained by the fleet of existing vehicles. This is shown in Figure 5, which depicts the rise in miles per gallon of the average car from 13 mpg in 1973 to about 22 mpg currently. Figure 5 contrasts mpg data on the new car fleet for each (model) year.

PASSENGER CAR FUEL EFFICIENCY

[graph omitted]

THE AGING AUTO -- MOTOR VEHICLE AGE DISTRIBUTION

Figure 6 depicts the age distribution of cars on the road. The age of the average car has risen from 5.7 years in 1974 to 7.9 years in 1991. Having declined in age since World War II, the fleet was newest in 1969 and has aged steadily since the Arab Oil Embargo. It continues to age.

Figure 6 shows the distribution of cars by age in 1970 and 1991. The comparison shows that the current vehicle fleet has aged markedly. With one major exception, each age group shown on this graph contained a higher percentage of the fleet in 1970 than it did in 1991. The big exception is the age class of cars 10 years old and older. This grouping jumped from 11.6 percent of the fleet in 1970 to 30.4 percent in 1991. The number of very old cars on the road has increased sharply. And the percentage of in-use cars 3 years old or newer has fallen from 58 percent to 36 percent.

Since autos of each model year have basically become more fuel efficient since 1975, the aging of the fleet means that cars that got lower mpg when new are remaining in use in much greater proportion than previously. And new, fuel-efficient cars are not entering the fleet at as high a rate as in years gone by. This combination of factors, plus the fact that mileage tends to deteriorate as cars age, has deferred the realization of reduced gasoline demand, which CAFE sought to achieve. Realistically, CAFE-induced gasoline consumption can only occur as the composition of the fleet of vehicles actually in use changes.

AUTOMOBILE AGE DISTRIBUTION 1970 vs. 1990 (Percent of Fleet)

[graph omitted]

THE ON-THE-ROAD VEHICLE FLEET -- GROWTH, DEMOGRAPHICS AND NEW STOCK

The total number of vehicles -- cars, trucks and buses -- on the road has increased 77 percent during the past two decades, from 108 million in 1971 to 191 million in 1991. There are 83 million more vehicles on the road than there were in 1971; the number of cars, trucks and busses has been rising at 4 million per year.

In comparison, the number of licensed drivers rose by 55 million (48 percent) -- from 114 million in 1971 to 169 million in 1991. The number of vehicles increased by a larger increment than the number of drivers. And there are more vehicles than licensed drivers.

While registered vehicles and licensed drivers numbers are growing, new vehicle sales show little upward movement. Figure 7 illustrates the public's lackluster interest in purchasing new vehicles. Despite a greater number of motorists driving more vehicles, a larger number of miles per vehicle, there is widespread antipathy toward purchasing new vehicles. The result was little upward trend in new car and truck sales, which averaged 14.2 million units over the 20 year 1971-91 period.

One factor which may shed some light on the motoring public's reluctance to buy new vehicles is that they have become more expensive. Consumer expenditures per new car ¹ have risen from $3,742 in 1971 to $16,700 in 1992. Adjusted for inflation as measured by the consumer price index, this measure of new car cost has increased 40 percent in real dollars.

RETAIL CAR AND TRUCK SALES IN THE U.S. 1971-1991 (million units)

[graph omitted]

CAFE

The search for ways to reduce oil imports following the 1973-74 Embargo focused on the low fuel efficiency of U.S. automobiles. This resulted in the enactment of fuel economy standards as part of the Energy Policy and Conservation Act of 1975 (EPCA). EPCA mandated that new cars average 18.0 mpg by 1978, 20.0 mpg by 1980 and 27.5 mpg by 1985. Interim standards were set by the Secretary of Transportation for 1981-84. But by the mid-1980s, declining real gasoline prices, consumer preference for less fuel-efficient autos, and U.S. automaker pleas led DOT to reduce the standard to 26.5 mpg through 1989. The 27.5 mpg standard has been in effect since 1990.

Figure 5 also shows the total fleet average for all (new) cars of a model year, contrasted with the actual mpg for all autos on the road. The data includes imports as well as domestic vehicles. The overall average figure is somewhat higher than CAFE, which applies only to the domestic fleet.

Figure 5 highlights how sharply divergent the actual fuel efficiency of the on-the-road vehicle fleet is from the new car average. It also shows how slowly the gap between new car mpg and the on-the-road average has narrowed, especially during more recent years. Theoretically, this gap (where current experience is 23 percent below the potential mpg of a completely updated fleet) will close as obsolete vehicles are scrapped. But the fleet continues to age. Motorists appear reluctant to buy new vehicles and prefer to keep older cars in service longer. Were the mpg gap to be closed today (and all else remain equal) gasoline demand would be reduced by about 1.5 mbd.

CALLS FOR A GASOLINE TAX

Advocates of a gasoline tax boost argue that slow progress toward the promise of CAFE requires some change in the current fuel economy patterns. Aged gasoline guzzlers must be replaced by more fuel efficient vehicles, presumably new units. The list of those calling for a gasoline tax has been joined by auto manufacturers concerned about the new vehicle market. Their logic is likely based on higher fuel prices creating a demand for new fuel efficient vehicles thus spurring sales. Vehicle sales have not grown in proportion to licensed drivers or total number of registrations. In addition to those wishing to sell more new vehicles, gasoline tax proponents include seekers of revenue for the Treasury, environmental improvements and reductions in both driving and oil imports.

It is difficult to construct a gasoline tax that does not affect certain groups disproportionately. Non-neutral tax effects create a range of policy challenges, including:

o The burden of the tax falls heavily on western states with low population densities, such as Wyoming, North Dakota, Nevada, and Montana. Conversely, high population density states like New York and Pennsylvania benefit from lower per capita gasoline tax incidence.

o Lower income consumers use less gasoline than those in higher income brackets, but their gasoline expenditures are a higher proportion of income. Thus, a gasoline tax is widely seen as regressive.

o Most economists, supported by extensive macroeconomic modeling, find a gasoline tax a second-choice option to an income tax, or perhaps a broad-based energy tax, as a source of federal revenues, generating more negative macroeconomic effects per net Treasury dollar.

Raising Federal Revenues

Whatever its policy dilemmas, a motor fuels tax does reduce consumption and generate revenues. One billion dollars are collected through an already existing tax collection mechanism for every cent of gasoline tax (and an additional $300 million through every cent of diesel fuel tax increase). Motor fuel taxes are potent tools for generating revenues for the Treasury, for good or ill.

Reducing the Demand for Oil Imports

The Energy Information Administration (EIA) has modeled the impacts on petroleum demand of various levels of tax in its April 1991 Studies of Energy Taxes. ² Table 1 below shows estimated reductions in gasoline demand from various levels of gasoline tax. These figures are calculated for gasoline (only) based on DOEs estimates of a tax imposed on both gasoline and diesel fuel. ³ Much, if not most, of this reduced demand should result in reduced imports.

  TABLE 1. REDUCTIONS IN GASOLINE DEMAND -- IN YEAR OF TAX IMPOSITION

DOE also estimates the effect various amounts of tax have on the fleet's fuel economy. Its model analyzes the effect of both price- induced conservation and improvements in the fuel efficiency of the new and existing auto fleets in the longer run. Table 2 below shows the market-driven effects of hypothetical taxes on vehicle efficiency, absent any change in CAFE standards.

     TABLE 2. EFFECT OF GASOLINE TAX PROPOSALS ON AUTO EFFICIENCY

DOE's forecast response to a gasoline tax -- taken together with the discussion contained in the bulk of this report -- is suggestive of a number of policy items. With regard to new vehicles, DOE believes mpg can be expected to increase over time in any case. By the beginning of the next century, the amount of increase is related to the price of gasoline. With regard to the proposed taxes, each 10 cents per gallon of tax ultimately results in about a 1 mpg improvement in new car mileage.

With regard to the existing fleet, continued slow turnover approximately halves the impact; on-the-road fleet mpg improves by only one-half of a mpg for each 10 cents of tax increase.

A CONCLUDING NOTE

This discussion helps to delineate some of the pro and con arguments of a gasoline tax as a policy tool. Those favoring a gasoline tax can assert that new car fuel economy is market driven. Even without increasing existing CAFE standards, consumers will demand a higher mpg mix of new vehicles as gasoline prices rise. And they will not retain older, less efficient vehicles as long as they might absent high gasoline prices. The policy implication is that auto manufacturers will produce cars demanded by consumers. If gasoline prices rise and cause consumers to demand high mpg new cars, they will be manufactured. New vehicle efficiency is driven by consumer demand. Perhaps CAFE has led the way, but it is argued that further improvements in the new fleet will be market driven if gasoline prices rise.

But the other side of this argument is that the real gasoline consumption concern is the overall efficiency of the existing fleet, and its very slow rate of improvement. Even in the face of large hypothetical gasoline taxes, historic experience over the past 20 years points toward a relatively meager response in fleet averages. Significant reductions in gasoline consumption will be achieved very slowly, as older, less efficient vehicles are retired from the fleet. This will happen naturally as a function of vehicle age. A tax would certainly hasten the process. But some economists are concerned that this might not be sufficient to offset substantial adverse effects, measured in marginally slowed economic growth, regional and sectional disparities of impact, and some regressivity.

² Report number SR/EMEU/91-02.

³ Ibid., p. 5, Table 1.