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How important are fuel excise taxes?

As gas prices have soared, various polities have proposed the reduction or temporary elimination of excise taxes on fuel, to provide relief to households. There are various issues attached to this proposal, and we touch on a few in this post.

How much relief would this provide? To answer this question, we propose the FRED graph above, where we express the fuel excise taxes at the state and federal levels and express them as a percentage of disposable income. (That is, the income that household have for expenses after paying taxes.)

The first thing we see is that this percentage has been declining almost constantly, more than halving in about three decades of data. The second thing is that, as of 2020, about a quarter of a percent of disposable income is dedicated to fuel excise taxes. Is that a lot or not? We’ll let the reader make that judgement.

That said, prices do act as a signal of scarcity. If the recent surge in gas prices is a reflection of a mismatch between supply and demand, lowering the price to consumers is only going to aggravate that mismatch. Conversely, if the goal is to reduce fuel consumption for whatever reason, increasing its price is going to work better that reducing it.

How was this graph created: Search FRED for “federal diesel tax.” From the “Edit Graph” panel, use the “Customize data” field to search for and add the “federal gasoline tax,” “state fuel tax,” and disposable income series. (For the last, use the nominal not real measure.) Apply formula (a+b+c/1000)*100. (Use 100 here to get percentages and 1000 here to get the same units.)

Suggested by Christian Zimmermann.

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