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The Political Economy of Motor-Fuel Taxation

Abstract:
This paper examines the political and economic underpinnings of gasoline tax policy. The theoretical model extends the earlier work of Hettich and Winer (1988) to flush out the effect of a change in the pre-tax price of a taxable activity on the politically optimal tax rate. Using a large cross-sectional sample of U.S. states over 1960-94, the empirical model tests the predictions of the theoretical model within the context of the state tax policy on gasoline. While simultaneously controlling for other politico-economic influences, we find that the influence of changes in gas prices on tax rates is negative. To our knowledge, this is the first study to include a fully developed theoretical model and its empirical application to the gasoline market for a test of the votemaximizing model of tax policy.

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Energy Specializations: Petroleum – Markets and Prices for Crude Oil and Products; Petroleum – Policy and Regulation

JEL Codes:
L13 - Oligopoly and Other Imperfect Markets
E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General

Keywords: gasoline tax, tax policy, US, gasoline prices

DOI: 10.5547/ISSN0195-6574-EJ-Vol20-No1-3


Published in Volume20, Number 1 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.