Demand for Gasoline is Elastic

How do I know?

There’s a piece in today’s Washington Post (I won’t bother linking because it will disappear behind a paywall) reveling in the woes of local transportation planners because gas tax revenue is down. Why is it down despite prices being up?

Virginia last increased its tax, to 17.5 cents per gallon, in 1987, and the District and Maryland haven’t raised their tax rates since 1992. Maryland charges 23.5 cents a gallon; the District’s tax is 20 cents a gallon.

The federal government tacks on an 18.4-cent gas tax, which pays for much of its contribution to transportation projects. State officials said the amount they receive from the federal government could shrink if drivers look to conserve gas.

That’s right, these are like poll taxes or fees–they are a fixed amount per gallon, not a percentage of the price. So if I buy premium gas, a lower percentage of my gas bill is taxes. So when people buy less gas, they get less money. How do I know people are actually conserving gas?

State officials said that effect is starting to be felt. In June and July, when prices started jumping and drivers started changing habits, total gas tax receipts dropped by nearly $1 million in Virginia compared with the same months last year.

The same was true in the District, where gas tax revenue dropped sharply in June, to a level nearly $1 million less than last year. June also was disappointing in Maryland, where taxes came in $1 million less than projected. Numbers for July from the District and Maryland were not yet available.

So price goes up, consumption goes down. According to peak oilers, this happens for every commodity except oil.

Of course, this should be a good thing for regulators, right? They have less use of the roads, requiring less maintenance and less expansion. Pollution goes down, transit receipts go up, everybody wins, right?

Oh, wait, I forgot. Taxes are an end in and of themselves, not a tool to achieve a public good:

“If trends continue in terms of gas tax receipts, we’ll be broke in several years,” said Dan Tangherlini, the District’s director of transportation. “We’ll be in a position where we have to lay off administrative staff or we wouldn’t be able to match federal highway funds.”

Egads, not lay off administrative staff! Raising taxes is the only way to go, I guess. Since people are paying more for gas, they should pay…more…for gas…or something.

But the point is, there is hard evidence that prices influence behavior. The SUV was produced by pandering policies plummeting the price of petroleum.

A further note: I also read a piece in Scientific American (already behind a paywall) that pointed out the US economy grew 21% from the late Seventies to the mid Eighties, but oil usage declined 17%. So there is precedent for this kind of contraction. Yep, there was a bad recession through part of that period, but not even the majority of it.

Bottom line: High gas prices cause people to conserve. Capping the price will increase demand and cause shortages. Hawaii, you forgot to read your history books, didn’t you?

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