JACKFAU-84-315-2
COMPARISON OF THE MACROECONOMIC IMPACTS OF
HIGHWAY FUEL TAXES
(FINAL REPORT)
WORK ASSIGNMENT 2
CONTRACT NO. 68-03-3200
Submitted to:
U.S. ENVIRONMENTAL PROTECTION AGENCY
OFFICE OF MOBILE SOURCES
ANN ARBOR, MICHIGAN 48105
May 1985
JACK FAUCETT ASSOCIATES
5454 WISCONSIN AVENUE SUITE 1155
CHEVY CHASE. MARYLAND 20815
(301i 657-B223
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MOTE
This report contains analyses performed by Jack Faucett Associates for the
Office of Mobile Sources, U.S. Environmental Protection Agency. Technical
work on this report was completed by September 1984. The publication date
on the cover reflects the time required for the report to clear EPA peer
review.
Questions regarding this analysis should be directed to Todd A. Morrison or
Michael F. Lawrence of Jack Faucett Associates (301/657-8223).
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JACKFAU-84-315-2
COMPARISON OF THE MACROECONOMIC IMPACTS OF
HIGHWAY FUEL TAXES
(FINAL REPORT)
WORK ASSIGNMENT 2
CONTRACT NO. 68-03-3200
Submitted to:
U.S. ENVIRONMENTAL PROTECTION AGENCY
OFFICE OF MOBILE SOURCES
ANN ARBOR, MICHIGAN «1Q5
JACK FAUCETT ASSOCIATES
5454 WISCONSIN AVENUE SUITE 1155
CHEVf CHASE. MARYLAND 20B15
(30U657-8223
-------
TABLE OF CONTENTS
CHAPTER PAGE
I INTRODUCTION 1
n BACKGROUND 2
m HIGHWAY FUEL TAX SCENARIOS 6
IV MACROECONOMIC EFFECTS OF A HIGHWAY FUEL TAX 17
V SOURCES OF DIRECT TAX REVENUES 38
VI INDUSTRY EFFECTS 43
Vn CONCLUSIONS 47
APPENDICES
A SUMMARY OF METHODOLOGY USED TO PROJECT THE
MACROECONOMIC IMPACTS OF HIGHWAY FUEL TAXES 49
B ADDITIONAL TABLES FOR GNP/OIL IMPORTS/
BALANCE OF PAYMENTS ANALYSES 57
C ADDITIONAL TABLES FOR FEDERAL REVENUES ANALYSES 93
D ADDITIONAL TABLES FOR UNEMPLOYMENT ANALYSES 97
E ADDITIONAL TABLES FOR CONSUMER PRICES ANALYSES 99
F ADDITIONAL TABLES FOR SOURCES OF
DIRECT TAX REVENUES ANALYSES 102
i
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I. INTRODUCTION
This paper presents the results of an analysis of the macroeconomic effects of various
highway fuel tax options. Two tax levels are considered $0.40 per gallon and $0.70
per gallon (1983 dollars) under two different implementation schedules. In the first, it
is assumed that the entire tax is levied in 1989 without forewarning the public. This is
called a shock tax. In the second, it is assumed that the tax, enacted in 1986, is
implemented in equal, known, annual increments over the period from 1987 to 1991,
reaching $0.40 or $0.70 per gallon in 1991. This is called a phase-in tax. Three new
vehicle fleet fuel economy scenarios are used to represent the possible range of
improvements in vehicle fuel economy that could result from a tax. The effects of
each possible combination of tax size, tax schedule and new vehicle fleet fuel economy
on key macroeconomic variables are estimated and compared. All gasoline and diesel
fuel are affected by the highway fuel tax except fuel consumed by Class 8 trucks (GVW
greater than 33,000 lbs.), which is exempted from the tax under all scenarios.
The macroeconomic variables analyzed are real GNP; Federal revenues; the Federal
budget deficit; oil imports; the balance of payments; the unemployment rate; and
consumer price levels. The distribution of the tax burden among consumers, state
governments, the Federal government, foreign oil suppliers, and the domestic oil
refining industry is calculated for each scenario. The implications of the taxes for the
domestic motor vehicle industry and the domestic travel industry are also examined.
The effects of the various tax scenarios are compared with each other and with a non-
tax baseline scenario.
This analysis of the macroeconomic effects of various highway fuel tax options is a
systematic treatment of the subject. Although higher gasoline and diesel fuel taxes
have been proposed previously by presidential candidates and administrations, their
potential macroeconomic effects have not always been thoroughly considered. Further-
more, previous studies of the macroeconomic effects of highway fuel taxes have not
considered taxes of this magnitude, nor have they examined the effects of phasing in a
tax in known annual increments. Consequently, this paper presents an original,
innovative assessment of the macroeconomic effects of these highway fuel tax options.
1
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H. BACKGROUND
The United States has made considerable progress in recent years in improving its
energy security. Current energy supplies are ample. Real energy product prices have
moderated, and, for some products, fallen. The historically high relative price of oil
and a determined effort to lower oil imports have reduced domestic petroleum demand
by over 20 percent since 1978, reducing U.S. reliance on imported oil. Continued
petroleum conservation and the substitution of other fuels for petroleum in many
sectors of the economy are projected to limit the growth in petroleum demand to an
average annual rate of about 0.5 percent through 1995.1
Further progress is needed if the United States is to maintain or improve its current
position. Declining domestic petroleum production will require petroleum imports to
increase. If domestic petroleum demand grows, as expected, from 15.0 million barrels
per day (MMBD) in 1983 to about 15.0 MMBD in 1995, and domestic production falls
from 11.0 MMBD in 1983 to 9.0 MMBD in 1995, oil imports will grow from about 4.0
MMBD in 1983 to 7.0 MMBD in 1995.^ Thus, imports would supply 45 percent of U.S. oil
demand in 1995, up from approximately 27 percent in 1983.
Unless there are significant increases in non-OPEC petroleum supplies, most of these
imports will come from OPEC nations. Consequently, U.S. dependence on OPEC oil will
increase. Furthermore, if real oil prices rise only moderately over the period from 1983
to 1995 (about 1 percent per year), the forecasted 3 MMBD increase in imports would
cause expenditures on imported oil to double. Such a large increase in the imported oil
bill will have deleterious effects on the balance of payments and gross national product,
all other factors held constant.
The doubling of the imported oil bill, however, does not fully reflect the costs to the
United States of these imports. The total cost of imported oil properly includes the
market cost of the oil (the direct cost) and the social cost to the United States of
relying on large volumes of imported oil (the indirect cost). The latter is often referred
to as the social premium of imported oil. This premium is hypothesized to include such
costs as the impact of the level of U.S. oil imports on world oil prices; the impact of
large outlays for imported oil on the domestic economy (inflation, unemployment, lower
1U.S. Department of Energy, Office of Policy, Planning and Analysis, "Energy Projec-
tions to the Year 2010," October 1983; and Conoco Inc., "World Energy Outlook Through
2000," Spring 1984.
2Ibid.
2
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economic growth); the costs of any sudden supply disruptions; and the costs of assuring,
through military and diplomatic efforts, that foreign oil is available. These and other
factors comprise real costs to the United States which are not reflected in the market
price of the oil.
As U.S. dependence on OPEC oil increases, the vulnerability of the American economy
to a major supply/price disruption will increase, and the social costs of importing oil
will rise. Any shortage or price shock will curtail economic activity, reduce growth,
increase unemployment, increase inflation and redirect income flows to oil
producers. The Arab oil embargo during the last quarter of 1973 and the first quarter
of 1974 turned a mild recession into a deep one. By the end of 1974, reed GNP had
declined at a 7.5 percent annual rate, and employment had fallen by about 500,000
persons, increasing the unemployment rate by 0.5 percentage points. By the beginning
of 1976, the general price level, as measured by the GNP deflator, was up by
approximately 20 percent over the pre-embargo level. Similarly, the oil price increases
caused by the Iranian Revolution of 1979 resulted in substantially larger dollar outflows
from the economy and increased inflation. Net foreign oil payments by the United
States rose from $54.1 billion in 1979 to $71.0 billion in 1980, a 30 percent increase.
This situation compelled the Federal Reserve Board to contract the money supply and
force up interest rates. In response, GNP growth fell from an annual rate of 1.2
percent during the first quarter of 1980 to minus 9.6 percent in the second quarter.1
Given the predictable increase in United States reliance on OPEC oil production, the
U.S. government must increase its efforts to develop energy policies that will lead to
energy security. In view of the long lead times required to develop non-OPEC oil and
other energy sources, such efforts must begin now. These policies should encourage
petroleum conservation, fuel switching, supply diversification (both in terms of energy
source and country of origin), and the development of secure energy sources.
One policy which could decrease U.S. reliance on foreign sources of petroleum would be
a tax on imported oil. By levying a tax on each imported barrel, the domestic market
price of oil would rise to reflect the social premium. Furthermore, a tax would
encourage conservation of a scarce natural resource. It would also encourage energy
producers and consumers to consider alternative energy sources which cannot be
^Congressional Budget Office. Managing Oil Disruptions: Issues and Policy Options,
September 1981, pp. 3-11.
3
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offered at prices competitive with oil when the social premium is not fully reflected in
the market price of oil. These include domestic oil exploration and production, or the
development of a domestic alternative fuel industry such as fuel methanol from coal or
other sources. Either improves domestic energy security.
A tax on imported oil of sufficient magnitude to exact the results noted above,
however, will have pervasive economic impacts. Some of these may not be politically
or socially acceptable. Variations in the intensity of oil consumption among individuals,
industries, and geographic regions will raise equity issues that are not easily resolved.
The negative effects of the tax on large or politically powerful interest groups could
drain support despite the potential net benefit to the economy.
A tax on a single, important petroleum product might produce similar positive effects
with less negative economic effects than a tax on imported oil. The most promising
alternative is a highway fuel tax. Although this tax would not encourage conservation
of all petroleum products, it would maintain the incentive to conserve in the
transportation sector, which accounts for 50 percent of all U.S. petroleum consumption
(due to its dependence on petroleum-derived liquid fuels). It would elicit continued
improvement in new vehicle fuel efficiency (which has slowed recently due to lower
diesel and gasoline prices); and encourage the development of alternative motor vehicle
transportation fuels, produced from secure sources, which become competitive with
gasoline at higher prices. Fuel methanol is one such fuel. Thus, a tax on highway fuels
could contribute measurably to domestic energy security both by reducing domestic
petroleum consumption and by encouraging fuel switching in the transportation sector.
The reduction in domestic demand for imported petroleum would also improve the
nation's balance of payments position. In particular, it would reduce the deficit in the
merchandise trade balance, which has been negative since 1976 and which reached an
estimated deficit of $61.1 billion in 1983; and in the balance on current account, which
was negative in five of the eight years between 1976 and 1983 and which reached an
estimated deficit of $40.8 billion in 1983.* Such trade deficits represent a net transfer
of wealth from the United States to foreign countries.
Finally, a highway fuel tax would raise badly needed revenues for the Federal treasury.
The Federal government's budget deficit grew from $4.7 billion in 1974 to $195.4 billion
department of Commerce, Bureau of Economic Analysis. The merchandise account
measures exports and imports of goods. The current account measures exports and
imports of goods, services, investment income, and unilateral transfers of wealth.
4
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in 1983. It is estimated that the deficit will total approximately $175 billion for 1984,
and that it will grow to exceed $300 billion by 1990.* Since it is likely that large,
continuous Federal budget deficits have a detrimental effect on the economy, addi-
tional revenues raised through a highway fuel tax could be used to reduce future budget
deficits, positively affecting economic activity.
1 Congressional Budget Office. The Economic Outlook: A Report to the Senate and
House Committees on the Budget - Part 1. February 1984, p.17.
5
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ID. HIGHWAY FUEL TAX SCENARIOS
Two tax levels are considered for diesel fuel and gasoline $0.40 per gallon and $0.70
per gallon. Hie new tax would be added to existing gasoline and diesel fuel taxes, which
include a $0.09 per gallon federal levy and approximately $0.11 per gallon for most
states. The new taxes are implemented under two distinct schedules. Under the first, a
$0.40 or a $0.70 tax is levied in 1989, without forewarning the public.* This is called a
shock tax. Under the second, beginning in 1987, the tax is phased-in in equal annual
increments of $0.08 per gallon and $0.14 per gallon, reaching $0.40 per gallon and $0.70
per gallon, respectively, in 1991. The phase-in schedule and the ultimate 1991 tax level
are known to highway fuel consumers in 1986. This is called a phase-in tax. The
schedules for each alternative are shown in Exhibit 1.
The shock tax and the phase-in tax differ fundamentally in their approaches to the
implementation of the tax. The shock tax schedule implements the full tax immediate-
ly and without warning; most consumers and businesses will not have sufficient lead
time to adjust to the full tax until several years later. Under the phase-in tax, the
public knows the initial tax level a full year or more prior to implementation; and it has
five years to prepare for the full tax. During this interval many highway fuel
consumers could adjust to the higher 1991 fuel price by purchasing vehicles with greater
fuel efficiency than they would without having been forewarned about the tax.
Furthermore, new vehicle fuel economy improvements are more likely to occur, and to
occur sooner, under a phase-in tax than a shock tax due to earlier manufacturer
knowledge of the tax and longer lead times for adjustment. Consequently, the gradual
and known phasing in of the tax over a multi-year period should facilitate fuel economy
adjustments by consumers and manufacturers producing less severe economic disrup-
tions than the instantaneous price adjustment caused by a shock tax.
A. Assumptions
For purposes of this analysis it is projected that the real retail prices of gasoline and
diesel fuel remain constant at $1.30 per gallon, excluding the new highway fuel tax.
This is consistent with current oil industry expectations of essentially constant real
2
petroleum product prices through 1991. A corollary assumption is that a U.S. highway
fuel tax will not reduce world petroleum demand enough to depress the world price of
crude (equal to $33 per barrel).
*1989 was chosen as the first year of the shock tax because the revenues collected
between 1989 and 1991 under the shock tax are approximately equal to the revenues
collected between 1987 and 1991 under the phase-in tax.
2
Conoco Inc., op. cit., p. 2. 6
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40* Tax
Shock Tax
Phase-In Tax
70 e Tax
Shock Tax
Phase-In Tax
EXHIBIT 1;
TfxYv SC/ftSfim'SS ^/gallon)
1987 1388 19S9 1990 1991
0.00
0.08
o.oo
0.14
0.00
0.1S
0.00
o.za
~ .40
0.24
0.70
ft.41
0.40
0.32
0.70
Q.56
0.40
0.4a
0.70
0.70
7
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Baseline highway fuel consumption is projected to total 100 billion gallons per year (6.5
MMBD) for each year from 1987 to 1991.1 Of this amount, 92 billion gallons (6.0
MMBD) is considered taxable consumption for this analysis. The remaining 8 billion
gallons (0.5 MMBD) are the estimated fuel consumption of Class 8 trucks, which are
2 3
exempted from the tax for economic reasons. ' Any reduction in fuel demand due to
a highway fuel tax is assumed to reduce imports of petroleum. A fuel price elasticity
of -0.3 is used to calculate the price-induced petroleum conservation effects of a
4
highway fuel tax.
Scrappage and new vehicle sales are assumed to proceed at historically high rates 9
percent and 11 percent of the existing fleet in each year, respectively.** Only vehicles
in the fleet upon enactment of the tax are scrapped; vehicles purchased after
enactment of the tax remain in use throughout the analysis period. These assumptions
reflect the likelihood that these highway fuel taxes will encourage a more rapid
turnover in the vehicle fleet and hence a faster improvement in fleet fuel economy.
B. Factors Affecting New Motor Vehicle Fleet Fuel Efficiency
A shock or a phase-in highway fuel tax will increase the real cost of gasoline and diesel
fuel, encouraging additional improvements in new vehicle fuel efficiency. The amount
of improvement is important since greater increases in fuel efficiency will reduce the
macroeconomic impacts of the tax. Several factors affecting new vehicle purchase and
production decisions will interact to determine the actual improvements. These include
the following:
the importance of fuel economy in motor vehicle purchasing decisions;
the tax level on which vehicle purchasers base their fuel economy
decisions; and
*U.S. DOE, 1982 Annual Energy Outlook, April 1983, Tables A.4.4, B.4.4, C.4.4.
O
M. Millar et.al., Baseline Projections of Transportation Energy Consumption by Mode;
1981 Update. Argonne National Laboratory, April 1982, p. 146; and U.S. DOE, 1982
Annual Energy Outlook, op. cit.
3
Since Class 8 trucks often transport goods used in production, taxing their fuel
consumption could place U.S. firms at a competitive disadvantage vis-a-vis foreign
manufacturers by increasing the cost of intermediate goods.
^Price Elasticities of Demand for Motor Gasoline and Other Petroleum Products, U.S.
Department of Energy, May 1981.
^The vehicle scrappage rate averaged 7.0 percent of the existing fleet per year from
1972 through 1983. New vehicle sales averaged 10 percent per year over the same
period. 8
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the technical feasibility of greater fuel efficiency, at reasonable cost.
1. Importance of Fuel Economy to Consumers
Fuel economy is one of many vehicle characteristics which affect a new vehicle
purchase decision. Others include passenger and cargo capacity, performance, dura-
bility and reliability, maintenance costs, price, styling, luxury, function, and versatility.
As the real cost of fuel rises, however, fuel economy becomes increasingly important to
the new vehicle buyer. Why?
Motor vehicle operators can limit the percentage increase in annual fuel cost to less
than the percentage increase vn fuel price m two principal ways.* They can drive less,
reducing vehicle miles traveled (VMT) and fuel consumption; or they can drive a more
fuel efficient vehicle, thus limiting the percentage increase in real fuel cost per mile to
less than the percentage increase in fuel price. They can also follow both strategies,
reducing VMT and improving fuel economy as appropriate.
If fuel economy (in miles per gallon) improves less than proportionally with the increase
in the real price of fuel, real fuel cost per mile will rise, and VMT will fall. The
decrease in VMT will depend upon the change in fuel economy, the change in fuel price,
and the own-price elasticity of demand for fuel. Assuming the own-price elasticity of
demand for fuel is inelastic in the relevant range, the percentage drop in VMT will be
\ess than the percentage increase in fuel price. Finally, if fuel economy increases in
the same proportion as the real price of fuel, real fuel cost per mile will not change and
VMT will stay constant.
Will new motor vehicle buyers want to purchase sufficient fuel economy to keep real
fuel cost per mile constant if a highway fuel tax is enacted? Data from the ^O's
(Exhibit 2) show that fuel economy improvements between 1974 and 1983 helped reduce
the real fuel cost of the new auto fleet from about 7.8 cents per mile in 1914 to 4.5
cents per mile in 1983, well below the 1973 level of 6.2 cents per mile. This occurred
over a period when the real price of fuel rose by 40 percent (from 87.4 cents in 1973 to
122.8 cents in 1983). Similarly, improvements in light-duty truck (LDT) fuel economy
between 1978 and 1983 helped keep real fuel cost per mile approximately constant for
LDT operators over that period.
Several other secondary adjustments are available to reduce fuel costs including
changes in the use of individual vehicles by .multi-vehicle households. Such relatively
minor impacts will not be discussed in this paper.
9
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EXHIBIT 2:
REAL FUEL COST PER MILE MODEL YEARS 1973-1983
(1983 % iu Cents Per Mile)
Year Autos LDT'S
1973 6.2
1974 7.8
1975 6.9
1976 6.2
1977 5.8 11.7
1978 5.0 5.3
1979 6.0 6.6
1980 6.3 8.0
1981 5.9 7.4
1982 4.8 6.3
1983 4.5 5.6
10
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Improvements in new auto and LDT real fuel cost per mile did not occur in every year
between 1973 and 1983. For example, real fuel cost per mile for autos rose by over 25
percent between 1978 and 1980. The data do suggest, however, that reversing increases
in real fuel cost per mile is important to auto and LDT buyers. Thus, although a
highway fuel tax should increase real fuel cost per mile in the light-duty fleet in the
near term, new vehicle purchase decisions could eventually eliminate that increase, if
technology and product offerings are available at reasonable cost.
A similar adjustment is not expected for heavy-duty trucks subject to either tax.
Although heavy-duty truck fuel economy has improved in recent years, it has not
improved enough to offset rising real fuel costs.1 Therefore, it is likely that real fuel
cost per mile will rise above baseline levels for heavy~duty trucks not exempted from
the tax, despite significant gains projected for heavy-duty truck fuel efficiency through
1991.2
2. Tax Levels and Fuel Economy
If new motor vehicle buyers want to keep real fuel cost per mile constant following
enactment of a phase-in tax, on what tax level should they base their fuel economy
decision? The rational buyer will consider the tax level throughout the vehicle's useful
life. It is therefore reasonable to assume that most new vehicle buyers will consider
the full level of the phase-in tax when purchasing a new vehicle between 1986 and
3
1991. They will thus demand, on average, 30.8 percent greater fuel economy under a
$0.40 tax, and 53.8 percent greater fuel economy under a $0.70 tax, to keep real fuel
cost per mile constant in 1991. Under a shock tex scenario, consumers would not be
aware of the tax until it takes effect in 1989. Accordingly, consumers would continue
to purchase vehicles with baseline fuel economy in 1987 and 1988, and would only begin
to react to the tax in 1989.
3. Technical Feasibility of Greater Fuel Efficiency
If improvements in new auto fuel efficiency proceed according to the trend established
between 1973 and 1983, new fleet fuel economy will equal 32 "APG in 1986 and 39 MPG
^Joe Morris, National Academy of Science, Transportation Research Board.
2
Roberts and Greene project heavy truck (Class 7 and 8) fuel economy to improve from
about 6.3 MPG in 1983 to 6.7 to 7.8 MPG in 1991. Roberts, Glenn F. and David L.
Greene, Trends in Heavy Truck Energy Use and Efficiency. Oak Ridge National
Laboratory, Energy Division, October 1983, p. 35.
3
Even if the vehicle is eventually sold, the buyer will consider the full tax level because
it affects the resale price of the vehicle.
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in 1991. But baseline improvements in auto and LDT fuel economy are not expected to
proceed according to the trend established during the past decade if the real cost of
fuel does not increase. Most recent trends in new car fuel economy show a marked
tapering off. The major domestic manufacturers are not even expected to meet the
1985 standard of 27.5 MPG until 1986 or 1987. They are avoiding current CAFE
penalties only through the use of past CAFE credits.
If, as projected, baseline real fuel cost does not rise between 1985 and 1991, it is likely
that auto and LDT fuel economy will not increase much beyond that mandated by
corporate average fuel economy standards for 1985. These are 27.5 MPG for autos and
21.0 MPG for LDT's. Assuming that buyers consider the full level of the tax when
purchasing new vehicles, new auto fuel economy would have to equal 36 MPG under a
$0.40 tax and 42 MPG under a $0.70 tax in each year that the phase-in or shock tax was
in effect to keep real fuel cost per mile equal to what it would have been without the
tax. New LDT fuel economy would need to equal 27.5 MPG and 32 MPG in each year
under a $0.40 tax and a $0.70 tax, respectively, to keep real cost per mile constant.
Are these improvements in fuel economy possible? Exhibit 3 summarizes the results of
seven analyses of potential new automobile and/or LDT fleet fuel economy over the
period from 1985 to 1995. The data are the outward bounds of the respective MPG
estimates for each year. They show that if baseline fuel economy for autos and LDT's
remains approximately constant after 1985, manufacturers should be able to produce
vehicles whose average fuel economy would keep real fuel costs per mile constant.
These improvements in fuel economy, however, are more likely to occur under the
phase-in tax than the shock tax, since manufacturers will have longer lead times in
which to adjust production in response to the higher cost of fuel. Thus, the implications
of these projections for the analysis are the following:
If baseline fuel economy remains around 27.5 MPG for autos and 21.0
MPG for LDT's in the late 1980's, it is likely that manufacturers would be
able to produce vehicles whose average fuel economy would keep real fuel
costs per mile, under either the phase-in or shock tax, equal to what they
would have been given the baseline and no tax.
Fuel economy improvements are more likely to occur, and to occur
sooner, under a phase-in tax than a shock tax due to earlier manufacturer
knowledge of the tax and longer times for adjustment.
12
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EXHIBIT 3;
PROJECTIONS OF NEW AUTO/LDT POTENTIAL AVERAGE FUEL ECONOMY
(Miles Per Gallon)
1985 1990 1996
Gray/von Hippel (Auto)* 60.0
2
Shackson/Leach
1. No Mix Shift - Auto 32.2 37.9 41.8
2-Mix Shift Auto 32.2 39.1 44.4
3.LDT 19.4 21.1 22.2
SERI (Auto, LDT)3 50.0 80.0
Los Alamos (Optimum retooling)4 32.0 39.8
EEA5
1.Domestic Auto 30.7 37.7 46.1
2.Import Auto 36.1 43.3 47.4
3. Domestic LDT 23.5 28.0 28.0
4.Import LDT 25.8 31.4 31.4
Whitford/Doherty Auto6
1. Baseline 28.4 29.3 30.3
2. Nominal Changeover 29.2 33.0 34.9
3. Weight Reduction 29.2 35.1 45.5
4.Technological Limit 29.2 37.8 52.5
Whitford/Doherty LDT6
1. Baseline 19.4 21.1 22.2
2. Nominal Changeover 21.8 24.0 26.5
3. Weight Reduction 21.9 30.6 35.8
4. Technical Limit 21.9 31.7 42.8
1
California Energy Commission (Auto) 26.6 32.6 40.0
*Gray, Charles L., Jr. and Frank von Hippel, "TTie Fuel Economy of Light Vehicles."
Scientific American, May 1981, Vol. 244, No. 5, p. 48.
2
Shackson, Richard H. and H. James Leach, Maintaining Automotive Mobility; Using
Fuel Economy and Synthetic Fuels to Compete With OPEC Oil. The Energy Producti-
vity Center, Mellon institute, August 18, 1980.
3
Transportation Task Force of the Solar Energy Research Institute (SERI) Solar/Conser-
vation Study, "Conservation and Alternative Fuels in the Transportation Sector." June
25, 1980.
4
Ford, Andrew and Ronald J. Sutherland, The Outlook for Improved Automobile Fuel
Efficiency. Los Alamos National Laboratory, June 1982.
^Energy and Environmental Analysis, Inc., Tie Highway Fuel Consumption Model -
-Seventh Quarterly Report. April 15, 1982.
C
Whitford, R.K. and M. Doherty, Motor Vehicle Fuel Economy Estimated Cost and
Benefits 1980 to 2020. Automotive Transportation Center, Purdue University, West
Lafeyette, Indiana. Presented to the Transportation Research Board, January 18-22,
1982.
7
California Energy Commission, Technology-Potential for Automotive Fuel Economy
Improvement, December 1982. On road-fuel economy values estimated from CEC
projections foe 1982, 1S87, 1992, 1997, Table 7-3.
13
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C. Potential Changes In New Vehicle Fuel Efficiency
Given the above discussion, what changes in new vehicle fuel efficiency may occur?
One possible outcome is that new vehicle purchase and new vehicle manufacture
decisions will keep each year's new fleet fuel efficiency at the level that would make
real fuel cost per mile under either a $0.40 or $0.70 tax equal to what it would have
been in 1991 without the tax. This requires that average new vehicle fuel efficiency
increase above baseline projections by the percentage increase in the cost of fuel in
1991. Thus, vehicles purchased between 1986 and 1991 under the phase-in tax and
between 1989 and 1991 under the shock tax would need average fuel economy gains of
30.8 percent with a $0.40 tax, and 53.8 percent with a $0.70 tax over the projected 1991
fuel economy levels. These gains would allow new motor vehicle operators to maintain
VMT at baseline levels.
A second possibility is that consumers might demand, and manufacturers provide,
vehicles identical to those purchased in the absence of the tax. This would occur if
drivers choose to reduce VMT rather than to keep real fuel cost per mile constant.
Consumers might choose this path if the cost of vehicles with higher fuel efficiency is
prohibitive, if these vehicles do not meet their other requirements (passenger or cargo
capacity, performance, luxury), or if the vehicles cannot be developed in time. In these
instances, consumers might keep fuel efficiency constant and allow real fuel cost per
mile to increase in proportion to the increase in the tax in each year.
A third possible result is that new vehicle purchase and manufacture decisions will lead
to some improvement in fuel efficiency above baseline estimates, but not the full
adjustment required to keep real fuel cost per mile constant in 1991. The annual
percentage increases in fuel efficiency could be the same from year to year, or might
be progressively larger. VMT will decrease, but not by as much as if no improvement
occurred in fuel efficiency.
A fourth possibility would embrace aspects of each of the three previous outcomes. For
example, vehicles purchased in the initial year of a tax may not have better fuel
efficiency than those purchased in the absence of the tax. The fuel efficiency of
vehicles purchased in the years between the initial tax year and 1991 may have
progressively higher average fuel efficiencies, but not be high enough to offset the real
14
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fuel price increase m 1991. Finally, vehicles purchased in 1991 may have high enough
fuel efficiency to offset, or almost offset, the real fuel price increase.
In general, the sooner buyers and manufacturers assimilate higher fuel costs into their
purchase and manufacture decisions, respectively, the sooner fuel economy adjustments
will occur. Consequently, real fuel cost per mile should return to its baseline level
sooner under a phase-in tax than under a shock tax. Under the proposed phase-in tax
schedule, consumers will know about the ultimate tax level six years in advance of
imposition. A possible scenario under the phase-in tax might see real fuel cost per mile
rise in 1987 and 1988, fall in 1989 and 1990 (but not to baseline levels), and return to
baseline in 1991. Such em adjustment pattern is evident in the historic light-duty fuel
economy data for 1978 to 1983. Under a shock tax, however, real fuel cost per mile for
autos and LDTs would probably increase in 1989, 1990 and 1991 since consumers and
manufacturers would not have sufficient time to react fully to the higher real cost of
fuel.
D. Fuel Economy Adjustment Scenarios
Because a single "most likely" scenario could not be selected, macroeconomic impacts
were estimated for three fuel economy adjustment scenarios for each tax level and
schedule. Two scenarios, identical to the first and second possible outcomes described
in Section m.C, bound the possible changes in fuel economy and the resultant changes in
macroeconomic variables. These are called the Full Fuel Economy (Full FE) Adjust-
ment and the No Fuel Economy (No FE) Adjustment scenarios.
A third scenario, called the Fifty Percent of Full Fuel Economy Adjustment scenario (or
1/2 FE), was also analyzed. Under this scenario, annual fuel economy improves enough
to limit the increase in real fuel cost per mile in 1991 to 50 percent of what it would
have been in the absence of any fuel economy adjustment. The macroeconomic impacts
of a phase-in tax with 1/2 FE adjustment, and of a shock tax with 1/2 FE adjustment,
are used in the remainder of this report to compare and to contrast the macroeconomic
impacts of the shock and phase-in taxes. Although the macroeconomic impacts
associated with the other two scenarios are included in the exhibits, they will not be
discussed in the text except where such discussion serves to highlight the importance of
fuel economy adjustment in this analysis.*
*The reader is encouraged to refer to the macroeconomic impacts of the other scenarios
since the estimated impacts effectively bound the expected range of impacts.
15
-------
In conclusion, it should be noted that the phase-in tax inherently allows automotive
manufacturers a much greater ability to make higher fuel economy vehicles available to
consumers. Thus, the comparison of a shock tax with 1/2 FE adjustment with a phase-in
tax with Full FE adjustment, or of a shock tax with No FE adjustment with a phase-in
tax with 1/2 FE adjustment, may better reflect the true differences between a shock
tax and a phase-in .ax of identical levels. Since the follow * text will concentrate on
comparing the 1/2 FE adjustment scenarios for both the shock and phase-in taxes, the
data and subsequent conclusions may mask some of the relative benefits of the phase-in
approach, i.e., the actual macroeconomic effects could be more favorable for the
phase-in tax than this analysis indicates.
E. Scenarios
Twelve scenarios were analyzed six for a shock tax, and six parallel scenarios for a
phase-in tax. Each of these scenarios are defined by the level of the tax, the tax
schedule, and the change in fuel economy. They are listed below:
401 Tax
1. Shock Tax
No FE Adjustment
i FE Adjustment
Full FE Adjustment
2. Phase In Tax
No FE Adjustment
k 1986 FE Adjustment
Full 1986 FE Adjustment
70* Tax
1. Shock Tax
No FE Adjustment
i FE Adjustment
Full FE Adjustment
2. Phase In Tax
No FE Adjustment
i 1986 FE Adjustment
Full 1986 FE Adjustment
16
-------
IV. MACROECONOMIC EFFECTS OF A HIGHWAY FUEL TAX
The macroeconomic impacts of the various highway fuel tax options were estimated
over the period from 1987 through 1991 for the phase-in tax; and from 1989 through
1991 for the shock tax. Changes from baseline projections were estimated for the
following macroeconomic variables:
real gross national product (GNP);
Federal government revenues;
the Federal government budget deficit;
the civilian unemployment rate;
the level of consumer prices; and
oil imports and the balance of payments.
Baseline estimates for the first five variables were taken or derived from Congressional
Budget Office projections (see Exhibit 4). Baseline oil imports were taken from U.S.
Department of Energy projections. Changes from these baseline estimates were
estimated using the Bureau of Labor Statistics macroeconomic model and Congressional
Budget Office analyses.* Appendix A summarizes the methodology used to project
these changes and should be consulted for a better understanding of the following
analyses.
Although macroeconomic impacts are presented in the tables for three fuel economy
scenarios, the reader is reminded that only the midrange scenario (50 percent of full
fuel economy adjustment, or 1/2 FE) will be discussed in the text. The other two
scenarios serve to bound the possible range of impacts, and will only be discussed if it is
necessary to illustrate the effect of the full range of possible fuel economy adjustments
on macroeconomic variables.
Congressional Budget Office, The Economic Outlook: A Report to the Senate and
House Committees on the Budget, February 1984; and U.S. Department of Labor,
Bureau of Labor Statistic, BLS Economic Growth Model System Used for Projections to
1990, April 1982.
17
-------
EXHIBIT 4:
BASELINE ECONOMIC PROJECTIONS
1986
1987
1988
1989
1990
1991
GNP-Billions of current dollars
4,339
4,704
5,084
5,481
5,905
6,372
GNP - Implicit Price Deflator
% Change from previous year
248.95
4.9
260.65
4.7
272.38
4.5
284.09
4.3
296.31
4.3
309.05
4.3
GNP-Billions of 1983 dollars
% Change from previous year
3,759
3.5
3,892
3.5
4,026
3.4
4,161
3.3
4,298
3.3
4,440
3.3
CPI-U (% Change from previous year)
Civilian Unemployment Rate (Percent)
Federal Budget (Billions of current
dollars)
Revenues
Outlays
Deficit
4.9
7.0
795
1,012
217
Oil Imports (millions of barrels per day) 6.21
4.7
6.8
863
1,112
248
5.89
4.5
6.6
945
1,227
282
5.60
4.3
6.5
1,016
1,342
326
5.45
4.3
6.4
1,095
1,446
351
5.86
4.3
6.3
1,181
1,560
379
5.86
-------
A. Real Gross National Product
ji
A highway fuel tax will affect the level of real GNP nf /everal ways. The predominant
impact is that by increasing the level of indirect business taxes collect ?d by the Federal
government, the tax will reduce personal income and personal consumption expendi-
tures, depressing GNP. Since domestic importation of foreign crude oh will decline, the
tax will also lower GNP by reducing domestic refining of foreign crude. The reduction
in crude oil imports, however, has an overall positive effect on GNP since domestic
expenditures on foreign output are reduced. Furthermore, the importation of other
goods and services will decline due to the reduction in personal income, positively
affecting GNP. Finally, if a portion of the increased Federal revenues collected from a
highway fuel tax are used to reduce the Federal government's budget deficit, interest
rates may fall, stimulating private investment and expanding GNP. The latter effect,
which could be very significant, was not considered in this analysis because the link
between the Federal budget deficit, the level of interest rates, and private investment
has not been determined empirically. If that link is positive (i.e., a reduced Federal
deficit increases GNP) then the. following figures overestimate the negative effects of
these taxes.*
Exhibit 5 shows that either a phase-in or a shock highway fuel tax will depress real GNP
under the conservative assumptions that the increased revenue is not spent by the
government to increase GNP and that the lower budget deficit does not promote
sufficient economic growth to offset the loss in GNP due to the tex. The cumulative
negative impact of the phase-in tax, however, is less than that of tre comparable shock
tax. Whereas a $0.40 shock tax will cause real GNP to fall $52.3 billion between 1987
and 1991, a $0.40 phase-in tax will lead to a reduction of $43.5 billion. If the ultimate
tax is $0.70, a shock tax will reduce real GNP by $82.9 billion; a phase-in tax will
reduce real GNP by $72.9 billion. The negative impact of the shock tax, furthermore, is
concentrated between 1989 and 1991, while that of the phase-in tax is spread over the
years from 1987 to 1991. Consequently, the decrease in real GNP in 1989, 1990, and
1991 is much less under the phase-in tax than under the shock tax. For example, a
$0.40 phase-in tax reduces GNP by only $8.8 billion in 1989, while a $0.40 shock tax
drops it by $18.2 billion.
For a discussion of the consequences of large and persistent Federal deficits and the
potential relationship between Federal deficits and interest rates, see CBO, op. cit.,
pp. 59-78.
19
-------
EXHIBIT 5:
CHANGE IN REAL GNP FROM BASELINE GNP UNDER EACH SCENARIO (Billions of 1983 Dollars)
1987
1988
1989
lb
1991
40* Tax
1. Shock Tax
No FE Adjustment
1 FE Adjustment
Full FE Adjustment
2. Phase In Tax
No FE Adjustment
i 1986 FE Adjustment
Full 1986 FE Adjustment
70* Tax
0
0
0
(4.2)
(2.5)
(0.4)
0
0
0
(8.2)
(5.8)
(2.6)
(19.1)
(18.2)
(17.2)
(11.9)
(8.8)
(4.7)
(19.1)
(17.5)
(15.7)
(15.7)
(11.8)
(7.2)
(19.1)
(16.6)
(14.9)
(19.1)
(14.6)
(9.5)
1. Shock Tax
No FE Adjustment
i FE Adjustment
Full FE Adjustment
2. Phase In Tax
0
0
0
0
0
0
(30.0)
(28.7)
(27.2)
(30.0)
(27.7)
(24.6)
(30.0)
(26.5)
(21.9)
No FE Adjustment
i 1986 FE Adjustment
Full 1986 FE Adjustment
(7.3)
(4.6)
(1.3)
(13.7)
(10.3)
(4.9)
(19.8)
(14.9)
(8.0)
(25.2)
(19.6)
(11.8)
(30.0)
(23.5)
(14.7)
-------
If the fuel economy elicited by a given phase-in tax is greater than that elicited by the
comparable shock tax (which, as discussed earlier, is very likely), then the difference
between the drop in real GNP under the shoe fax anc
-------
$98.7 billion under a $0.40 shock tax;
$99.2 billion under a $0.40 hase-in tax;
$158.7 billion under a $0.70 shock tax; and
$162.0 billion under a $0.70 phase-in tax.
Thus, direct total revenues are almost equal for comparable shock and phase-in taxes.
The proposed highway fuel taxes will lower Federal revenues indirectly in two ways.
First, the reduction in fuel consumption due to the tax will cost the government $0.09
for every taxable gallon no longer sold. Second, the reduction in real economic activity
as a result of the tax will cause other Federal tax collections to fall.
Exhibit 6 shows that the net impact of these three forces is to increase Federal
revenues under both types of taxes. Net revenues collected between 1987 and 1991 will
equal:
« $85.5 billion under a $0.40 shock tax;
$87.2 billion under a $0.40 phase-in tax;
$137.8 billion under a $0.70 shock tax; and
» $141.5 billion under a $0.70 phase-in tax.
Thus, net revenues collected between 1987 and 1991 under parallel shock and phase-in
tax schedules (i.e., identical tax level and fuel economy adjustment) are almost equal,
as are net revenues in 1991. Furthermore, total net revenues collected over the period
are almost identical for a given ultimate tax level, regardless of the type of tax or fuel
economy scenario considered. Net revenues will range between $84.5 billion and $88.7
billion for a $0.40 tax, and between $134.Q billion and $146.9 billion for a $0.70 tax.
These new revenues could be used to reduce the Federal budget deficit, which is
projected to total $1.2 trillion over the period from 1987 to 1991 (see Exhibit 4).
Exhibit 7 shows the maximum annual reduction in the deficit that could be achieved
22
-------
EXHIBIT 6:
CHANGE IN FEDERAL REAL REVENUE UNDER EACH SCENARIO (Billions of 1983 Dollars)
40$ Tax
70$ Tax
1987
1988
1989
1990
1991
1. Shock Tax
No FE Adjustment
1 FE Adjustment
Full FE Adjustment
0
0
0
0
0
0
28.8
28.6
28.6
28.9
28.5
28.2
28.8
28.4
27.8
2. Phase In Tax
No FE Adjustment
i 1986 FE Adjustment
Full 1986 FE Adjustment
6.2
6.3
6.3
12.1
12.1
11.9
18.0
17.8
17.2
23.6
23.0
22.2
28.8
28.0
26.9
1. Shock Tax
No FE Adjustment
i FE Adjustment
Full FE Adjustment
0
0
0
0
0
0
46.7
46.3
45.8
46.8
46.0
45.0
46.7
45.5
43.9
2. Phase In Tax
No FE Adjustment
1 1986 FE Adjustment
Full 1986 FE Adjustment
10.7
10.6
10.6
20.6
20.1
19.4
30.1
29.1
27.5
38.8
37.2
34.9
46.7
44.5
41.6
-------
EXHIBIT 7:
CHANGE IN BUDGET SURPLUS (DEFICIT) UNDER EACH SCENARIO (Billions of 1983 Dollars)
1987
19B8
1989
1990
1991
Baseline
40* Tax
1. Shock Tax_
No FE Adjustment
i FE Adjustment
Full FE Adjustment
2. Phase In Tax
No FE Adjustment
4 1986 FE Adjustment
Full 1986 FE Adjustment
70* Tax
1. Shock Tax
No FE Adjustment
J FE Adjustment
Full FE Adjustment
2. Phase In Tax
No FE Adjustment
1 1986 FE Adjustment
Full 1986 FE Adjustment
(206.0)
0
0
0
5.9
6.1
6.3
10.2
10.3
10.5
(224.0)
0
0
0
11.7
11.B
11.8
0
0
- 0
19.9
19.5
19.1
(248.0)
27.8
27.6
27.7
17.3
17.3
17.0
45.1
44.8
44.3
29.0
28.3
27.1
(257.0)
28.1
27.8
27.5
22.9
22.5
21.9
45.5
44.9
44.0
37.7
36.4
34.4
(264.0)
28.1
27.8
27.2
28.1
27.4
26.a
45.5
44.5
43.0
45.5
43.6
41.0
-------
under each scenario. These projected reductions are less than the net revenues shown
in Exhibit 6 because they take into account the effect of additional government
expenditures, such as higher unemployment and welfare payments, that occur because of
the slowdown in economic activity resulting from the highway fuel tax. The net funds
available for deficit reduction over the period total:
$83.2 billion under a $0.40 shock tax;
$85.1 billion under a $0.40 phase-in tax;
$134.2 billion under a $0.40 shock tax; and
$138.1 billion under a $0.70 phase-in tax.
Once again, the cumulative totals and the 1991 levels are almost equal for comparable
shock and phase-in taxes; and total net funds available for reducing the budget deficit
are almost identical for a given ultimate tax level under all scenarios.
These funds need not necessarily all be used to offset the deficit, however. The
government might choose to spend some or all of them on additional goods and services,
expanding economic activity and real GNP. [n fact, comparison of the results in Exhibit
7 and those in Exhibit 5 suggests that the annual expenditure of these funds by the
Federal government would more than offset the reduction in annual real GNP due to the
imposition of a highway fuel tax. The net funds available are greater than the decline
in real GNP in each year under every scenario.
If the Federal government only wanted to offset the reduction in GNP attributed to a
highway fuel tax, it would not have to spend all of the revenue generated by the tax.
Assuming a very conservative Federal government expenditure multiplier of one, the
government would have to spend one dollar of the funds to reverse each dollar reduction
in GNP. The funds remaining to reduce the deficit after these expenditures are made
are shown in Exhibit 8. If the Federal government expenditure multiplier is greater
than one, the funds remaining would be greater. For example, Exhibit 9 shows the funds
remaining to reduce the deficit if the Federal government multiplier is 1.5.
25
-------
EXHIBIT 8:
FUNDS AVAILABLE TO REDUCE DEFICIT FOLLOWING GOVERNMENT EXPENDITURES
TO MAINTAIN REAL GNP IF GOVERNMENT EXPENDITURE MULTIPLIER EQUALS 1.0
(Billions of 1983 Dollars)
1987
1988
1989
1990
1991
40
-------
EXHIBIT 9:
FUNDS AVAILABLE TO REDUCE DEFICIT FOLLOWING GOVERNMENT EXPENDITURES
TO MAINTAIN REAL GNP IF GOVERNMENT EXPENDITURE MULTIPLIER EQUALS 1.5
(Billions of 1983 Dollars)
1987
1988
1989
1990
1991
40«> Tax
1. Shock Tax
No FE Adjustment
1 FE Adjustment
Full FE Adjustment
2- Phase In Tax
No FE Adjustment
i 1986 FE Adjustment
Full 1986 FE Adjustment
700 Tax
1. Shock Tax
No FE Adjustment
} FE Adjustment
Full FE Adjustment
2. Phase In Tax
0
0
0
3.1
4.4
6.0
0
0
0
0
0
0
6.2
7.9
10.1
15.1
15.5
16.2
9.4
11.4
13.9
25.1
25.7
26.2
15.4
16. 1
17.0
12.4
14.6
17.1
25.5
26.4
27.6
15.4
16.7
17.9
15.4
17.7
20.2
25.5
26.8
28.4
No FE Adjustment
1 1986 FE Adjustment
Full 1986 FE Adjustment
5.3
7.2
9.6
10.8
12.6
15.8
15.8
18.4
21.8
20.9
23.3
26.5
25.5
27.9
31.2
-------
Assuming a multiplier of one, the total net funds available to reduce the deficit
between 1987 and 1991 following reversal of the negative real GNP effects of the tax
would equal:
$30.9 billion under a $0.40 shock tax;
$41.6 billion under a $0.40 phase-in tax;
$51.3 billion under a $0.70 shock tax; and
$65.2 billion under a $0.70 phase-in tax.
Here emerges a critical difference between the shock tax and the phase-in tax:
following reversal of the negative real GNP effects of the tax, a larger quantity of
funds (35 percent more under a $0.40 tax, and 27 percent more under a $0.70 tax) will
be available to reduce the deficit under a phase-in tax than under a shock tax. This is
because real GNP will fall less if the highway fuel tax is phased in over the period from
1987 through 1991 than if it is levied at its full level in 1989.
This difference is even greater if the actual improvement in fuel economy under the
phase-in tax exceeds that under the shock tax, as is likely. For example, if 1/2 FE
adjustment occurs under the shock tax but Full FE adjustment occurs under the
phase-in tax, the total net funds available to reduce the deficit following reversal of
the negative real GNP effects of the tax (assuming a conservative Federal government
expenditure multiplier of one) would equal $59.1 billion for a $0.40 phase-in tax, or 91
percent more than for a $0.40 shock tax; and $91.4 billion for a $0.70 phase-in tax, or
78 percent more than under a $0.70 shock tax.
The following list summarizes the major conclusions of the analysis with respect to the
effect of the alternative tax schedules on Federal revenues, expenditures, and the
budget deficit:
The level of total direct revenues raised under either the phase-in or
shock tax is almost equal over the period from 1987 through 1991. Of
course, the $0.70 tax raises more revenues than the $0.40 tax.
28
-------
The level of net revenues collected between 1987 and 1991 is almost equal
under either tax schedule, under any fuel economy scenario, for either the
$0.40 or $0.70 tax.
Net revenues collected under any scenario are sufficient, if expended, to
offset the reduction in real GNP attributed to the tax and to significantly
reduce the Federal budget deficit, even assuming a conservative Federal
government expenditure multiplier of one. A. higher multiplier would
allow an even greater reduction of the budget deficit.
If funds are used to offset the reduction in real GNP attributed to the
imposition of the tax, more funds will be available to reduce the deficit if
the tax is phased in than if it is levied at its full level in 1989. If the
phase-in tax elicits a greater improvement in fuel economy than the
shock tax, even more funds will be available to reduce the deficit under
the phase-in tax than under the shock tax.
For a given ultimate tax level and schedule, the greater the fuel economy
improvement elicited by the tax, the more funds will be available to
reduce the deficit following reversal of the negative real GNP effects.
This is because net funds remain relatively constant as fuel economy
increases, while the negative effect on real GNP decreases.
C. Oil Imports and the Balance of Payments
A highway fuel tax will reduce domestic demand for imported goods and services
directly by reducing demand for imported oil (due to the higher price of gasoline and
some diesel fuel); and indirectly by reducing personal income and thus personal
consumption expenditures on imported goods and services. The domestic balance of
payments position will therefore improve since the balance on merchandise trade and on
current account will improve.
The positive effect on the balance of payments is greater under the phase-in tax
schedule than under the shock tax schedule. This is because the phasing in of the tax
encourages earlier improvements in fuel economy, greater fuel conservation, and hence
a greater reduction in oil imports. As shown in Exhibit 10, oil imports between 1987
and 1991 are reduced by:
29
-------
EXHIBIT 10:
CHANGE IN OIL IMPORTS UNDER EACH SCENARIO (Millions of Barrels)
40
-------
698.8 million barrels under a $0.40 shock tax;
940.6 million barrels under a $0.40 phase-in tax;
1,173.6 million barrels under a $0.70 phase-in tax; and
1,501.7 million barrels under a $0.70 phase-in tax.
These figures translate into average daily oil import reductions of 0.4 million barrels
per day, 0.5 million barrels per day, 0.6 million barrels per day, and 0.8 million barrels
per day, respectively, over the period from 1987 to 1991. These average daily
reductions will increase as the fuel economy elicited by the tax improves. Thus, if the
phase-in tax elicits a greater improvement in fuel economy than the shock tax, as
expected, then the reduction in oil imports will be even greater under the phase-in tax.
Exhibit 11 presents the change in the balance on current account that will occur in
each scenario. Under the midrange fuel economy scenario, between 1987 and 1991 the
balance on current accounts will improve by:
$25.8 billion under a $0.40 shock tax;
$33.6 billion under a $0.40 phase-in tax;
$42.9 billion under a $0.70 shock tax; and
$53.7 billion under a $0.70 phase-in tax.
If the United States runs a trade deficit between 1987 and 1991, these reductions in
imports will improve the balance on current account and the the overall strength of the
nation's balance of payments, substantially reducing foreign claims on domestic
economic resources.
The following conclusions may be drawn to summarize the major effects of the
proposed alternative highway fuel taxes on the balance of payments and oil imports:
31
-------
EXHIBIT 11:
CHANGE IN BALANCE ON CURRENT ACCOUNT UNDER EACH SCENARIO (Billions of 1983 Dollars)
40
-------
Imposition of any of the alternative highway fuel taxes would lead to a
substantial reduction in oil imports and a significant decrease in any
existing U.S. trade deficit. The $0.70 tax produces greater reductions
than the $0.40 tax.
At a given tax level, oil imports and any existing trade deficit will
decrease more if the tax is phased in rather than levied at its full level
(shock tax) in 1989. If the phase-in tax elicits a greater improvement in
fuel economy than the shock tax, the comparative decrease will be even
greater.
The greater beneficial effects of the phase-in tax on oil imports and the
balance of payments arises from the fact that the phase-in taxes
encourage earlier improvements in fuel economy and greater fuel conser-
vation than the shock taxes.
Reversal of the negative GNP effects of a highway fuel tax through the
government expenditure of some of the net funds collected will only
reduce the positive effects on the balance of payments slightly since only
the demand for foreign goods and services other than oil will increase.
D. Civilian Unemployment
Impacts on civilian employment due to the imposition of a highway fuel tax are directly
related to changes in real GNP. Assuming both that none of the tax revenues are
expended to maintain baseline GNP and that lower Federal budget deficits do not
increase economic growth, unemployment can be expected to increase slightly. Since
the reduction in real GNP under the shock tax exceeds the reduction in real GNP under
the phase-in tax in nearly every year considered under every scenario (the only
contradictions occurring in 1987 and 1988 when no change in real GNP occurs under the
shock tax schedule since no tax is levied), then unemployment will rise more under a
shock tax than under a comparable phase-in tax.
Projected annual increases in the civilian unemployment rate, based on a reduction in
real GNP, are presented in Exhibit 12, rounded off to the nearest tenth of a point. Note
33
-------
EXHIBIT 12;
CHANGE IN CIVILIAN UNEMPLOYMENT RATE FROM BASELINE FOR EACH SCENARIO (%)
40* Tax
70* Tax
1987
1988
1989
1990
1991
Baseline
6.8
6.6
6.5
6.4
6.3
1. Shock Tax
No FE Adjustment
J FE Adjustment
Full FE Adjustment
n
o
o
o
o
o
0.2
0.2
0.2
0.2
0.1
0.1
0.2
0.1
0.1
2. Phase In Tax
No FE Adjustment
i 1986 FE Adjustment
Full 1986 FE Adjustment
0.0
0.0
0.0
0.1
0.1
0.0
0.1
0.1
0.0
0.1
0.1
0.1
0.2
0.1
0.1
1. Shock Tax
No FE Adjustment
I FE Adjustment
Full FE Adjustment
0
0
0
0
0
0
0.3
0.3
0.2
0.3
0.2
0.2
0.2
0.2
0.2
2. Phase In Tax
No FE Adjustment
) 1986 FE Adjustment
Full 1986 FE Adjustment
0.1
0.1
0.0
0.1
0.1
0.0
0.2
0.1
0.1
0.2
0.2
0.1
0.2
0.2
0.1
-------
that as fuel economy improvements increase for a given tax, the increase in the civilian
unemployment rate will become smaller since the reduction in real GNP will become
smaller.
If the Federal government expends a portion of the increased tax revenues to maintain
real GNP, however, the negative effects of a highway fuel tax on civilian employment
will be eliminated, and the civilian unemployment rate will return to baseline levels.
Furthermore, if the government chooses to expend sufficient tax revenues to expand
real GNP beyond baseline levels, unemployment could be reduced, The following
conclusions regarding the effect of the proposed taxes on civilian unemployment may
then be drawn:
« Assuming that all Federal tax revenues are used to reduce the budget
deficit and not to maintain GNP growth, then all of the alternative
highway fuel tax proposals will increase unemployment slightly. Annual
civilian unemployment under a shock tax will generally exceed that under
a comparable phase-in tax because decreases in annual real GNP will be
greater for the shock tax.
If the reduction m real GNP is reversed by the expenditure of part of the
revenues collected through the tax, the increase in civilian unemployment
will be reversed. In fact, if all of the increased revenues were spent by
the Federal government, then unemployment could be reduced.
E. Consumer Prices
An increase in the cost of gasoline and diesel fuel due to the imposition of a tax will
affect consumer prices in three ways:
by increasing the cost of fuel directly consumed;
by increasing the cost of other final goods and services, either directly or
indirectly; and
e by depressing real GNP, indirectly reducing pressure on prices.
Exhibit 13 presents the level of consumer prices for each year under each scenario
(1986 = 100), as well as the projected baseline consumer price level. This baseline
35
-------
EXHIBIT 13:
Baseline
40* Tax
1. Shock Tax
No FE Adjustment
i FE Adjustment
Full FE Adjustment
2. Phase In Tax
No FE Adjustment
i 1986 FE Adjustment
Full 1986 FE Adjustment
70
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shows that m the absence of a highway f\ie\ tax, the general consumer price level in the
economy will increase by 24.1 percent between 1986 and 1991. If a $0.40 tax is levied,
consumer prices will increase by 25.8 percent over the same period, regardless of
whether the tax is phased in or not, and regardless of the level of fuel economy.
Similarly, a $0.70 tax will cause consumer prices to increase by 27.6 percent between
1986 and 1991. Consumer prices will be 1,4 percent higher in 1991 under a $0.40 tax
than they will be under baseline assumptions; and 2.8 percent higher under a $0.70 tax
12 3
than they would be under baseline assumptions. ' *
Because of the way consumer price levels are calculated, the final level of consumer
prices depends only upon the final level of the tax. Only the trajectory of consumer
prices, and hence the annual level of prices and year to year changes between 1986 and
1991, are dependent on the implementation schedule. Consequently, consumer prices
are higher in 1987 and 1988 under a phase-in tax than under a shock tax; and higher in
1989 and 1990 under a shock tax than under a phase-in tax.
The following conclusions can be reached about the effect of the alternative highway
fuel taxes on consumer prices:
AU of the alternative highway fuel tax options will rais^ overall consumer
prices slightly. Consum er prices wiLl be higher in L591 under a $0.73 tax
than under a SD.40 tax.
The level of consumer prices in 1991 is independent of the type of tax or
the level of fuel economy; it depends only upon the ultimate level of the
tax.
The trajectory of consumer prices between 1986 and 1991 depends upon
the tax implementation schedule.
1 Year-to-year percentage changes in consumer prices may be calculated by dividing the
price level in a given year by the price level in the previous year, subtracting 1, and
multiplying by 100. Thus, the baseline change in consumer prices between 1990 and
1991 is calculated as follows: [(124.1 -t-119.0) - l]x 100 = 4.3 percent.
2
These consumer price levels were calculated using the market basket and relative
importance factors inherent in the consumer price index as of March 1984. If a highway
fuel tax reduces consumption of highway fuel dramatically in the period between 1987
and 1991, the importance of highway fuel in the consumer market basket could be
reduced. If this is the case, the impact of the highway fuel tax option on consumer
price levels is overstated.
3
If the effect of the change in GNP on prices was ignored, consumer price levels would
be 1.8 percent higher in 1991 under a $0.40 tax than under baseline assumptions; and 3.6
percent higher under a $0.70 tax than under baseline assumptions.
in
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V. SOURCES OF DIRECT TAX REVENUES
A highway fuel tax will increase total consumer expenditures on gasoline and diesel fuel
because the demand for fuel is inelastic. Since fuel consumption falls, however, gross
revenues accruing to the oil exporting countries and to the domestic petroleum refining
industry will decline. Furthermore, state and local governments will lose an average of
$0.11 in fuel tax revenue for every gallon no longer sold. Similarly, the Federal
government will lose $0.09 in fuel tax revenue for every gallon no longer sold.
(Nevertheless, the net effect on Federal tax revenues will be very positive, as shown
earlier.} Consequently, the foreign oil suppliers, the domestic petroleum refining
industry, state and local governments, and even the Federal government itself can be
characterized as contributing a portion of the direct revenues collected under a
highway fuel tax. Although consumers pay the entire tax, their incremental contri-
bution is only that portion equal to their total expenditures on fuel in the presence of
the tax less their total expenditures on fuel in the absence of the tax.
This is illustrated in Exhibit 14 where D Dr represents the demand for transportation
fuel refined from imported oil. Here, P and Q are the market clearing price and
quantity, respectively, in the absence of a tax. The distribution of the total
expenditures represented by rectangle POQW is as follows:
A and A' accrue to foreign oil suppliers;
B and B' accrue to the domestic petroleum refining industry;
C and C1 accrue to state and local governments; and
D and D1 accrue to the Federal government.
If a highway fuel tax is levied, the market clearing price and quantity shift to P' and Q\
Since the demand for fuel is inelastic, the total revenues represented by rectangle
P'OQ'W1 are greater than the total revenues represented by rectangle POQW. The
distribution of these revenues is as follows:
38
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EXHIBIT 14:
ILLUSTRATION OF THE ALLOCATION OF EXPENDITURES
ON MOTOR FUEL REFINED FROM IMPORTED OIL, WITH
AND WITHOUT A NEW HIGHWAY FUEL TAX*
39
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A accrues to foreign oil suppliers;
B accrues to the domestic petroleum refining industry;
C accrues to state and local governments; and
D, E, and F accrue to the Federal government.
The revenue represented by E is equivalent to that represented by the sum of rectangles
A', B\ C', and D'. This is the contribution to direct tax revenues made in the form of
reduced revenues by foreign oil suppliers, the domestic oil refining industry, state and
local governments, and the Federal government. The contribution of consumers to
direct tax revenues is represented by rectangle F. Thus, it can be graphically seen that
consumers only contribute a portion of the overall incremental tax revenues.
Exhibit 15 shows the distribution of total direct tax revenues collected from 1987
through 1991 among these five contributors. In comparison to the distribution under a
shock tax, the phase-in tax will shift the burden of the tax from consumers toward
foreign oil suppliers and the domestic refining industry. For example, under a $0.40
shock tax consumers will provide 61 percent of the funds, foreign suppliers 23 percent,
and the domestic refining industry 9 percent. Under a $0.40 phase-in tax, however,
consumers will provide only 48 percent of the funds, while foreign oil suppliers will
provide 31 percent and the domestic oil refining industry 13 percent. A similar shift in
the tax burden occurs for a $0.70 tax. The shift in the burden from consumers toward
foreign oil suppliers and the domestic oil refining industry is even greater if the
phase-in tax elicits a greater improvement in fuel economy than the shock tax.
Foreign oil suppliers arid the domestic oil refining industry will provide a larger portion
of total direct tax revenues under the phase-in tax than under the shock tax because the
phase-in tax encourages earlier improvements in fuel economy and greater reductions in
fuel consumption and oil imports. Similarly, the greater the improvement in fuel
economy for a given tax scenario, the greater the share of revenues provided by foreign
suppliers and the domestic refining industry. For example, if a $0.40 tax is phased in
and there is no fuel economy adjustment, the revenues provided by consumers will equal
68 percent of total revenues, while those provided by foreign suppliers and the domestic
oil refining industry will equal 27 percent. If there is a full adjustment in fuel economy,
however, the foreign oil supplier/domestic oil refining industry share will grow to 67
percent while the consumer share will fall to 21 percent.
40
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EXHIBIT 15;
SOURCES OF TOTAL DIRECT TAX REVENUES, 1987-1991
(Percentage)
40
-------
In conclusion:
Tlie phasing in of a tax will shift the burden of the tax away from
consumers and toward foreign oil suppliers and the domestic oil refining
industry by increasing the share of total direct revenues contributed by
foreign oil suppliers and the domestic refining industry.
If the phase-in tax elicits a greater improvement in fuel efficiency than
the shock tax, the shift in the burden from consumers toward foreign oil
suppliers and the domestic oil refining industry is even more pronounced.
The greater the fuel economy improvement under a given tax schedule,
the greater the foreign oil suppliers/domestic oil refining industry contri-
bution to total tax revenues and the smaller the contribution of consu-
mers.
42
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VI. INDUSTRY EFFECTS
While a highway fuel tax will affect most industrial sectors, the domestic motor vehicle
manufacturing industry and auto travel related industries will be most directly
affected. Any type of sharp increase in the real price of fuel (whether a tax or an
increase in world oil price) will renew the demand for greater fuel economy and will
have important implications for the kinds of vehicles that the industry will be able to
sell. If the domestic industry could not provide the vehicles that the public wants, it
would lose market share to foreign manufacturers. This will lead to reduced domestic
manufacture of automobiles, increased outsourcing and importation from foreign
affiliate companies, reduced employment in the domestic industry, and lower profits,
making it more difficult for the industry to undertake the expensive investment
necessary to bring higher fuel economy vehicles on line.
This actually occurred between 1978 and 1982 in the domestic automobile market as a
result of escalating world oil prices. As reeil fuel prices rose rapidly and unexpectedly
from 99.6 cents per gallon in 1978 to 148.2 cents per gallon in 1981 in response to the
Iranian oil embargo, consumer preference shifted toward the small, fuel efficient
automobiles predominately offered by foreign makers. Between 1978 and 1981, the
small car share of the domestic market grew from 48 percent to over 65 percent, while
the large car share fell from 24 percent to 14 percent. Furthermore, the domestic
market for new cars contracted, falling from 11.3 million in 1978 to 7.9 million in 1982.
Meanwhile, import sales increased substantially, driving their market share from 17.7
percent in 1978 to 27.8 percent in 1982.1 Domestic manufacturers experienced record
losses over the period, and many hourly employees were laid off.
It is generally accepted that the consequences of the Iranian embargo were due sis much
to the abrupt and unforeseen nature of the fuel price rises as they were to the
magnitude of the price hikes. Consumers had no opportunity whatsoever to plan for the
higher prices. Implementation of a shock highway fuel tax would be similiar to an
abrupt exogenous price increase, since neither the public nor the industry would be
given any forewarning of the tax. Thus, the effects on the industry of a shock tax
would be similar to those that would occur if, without a tax, gasoline prices increased in
1989 by the amount of the tax.
^Automotive News Market Data Book, 1984.
43
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Under a phase-in tax, however, the industry will have six years forewarning about the
ultimate tax level. Furthermore, the known phase-in schedule will provide the industry
with greater certainty about fuel price levels in the intervening years. These aspects of
the phase-in tax will encourage the manufacturers to undertake the expensive invest-
ment required to produce more fuel efficient automobiles an investment which they
are not now willing to make in em era of falling real fuel prices and rising large car
sales. Thus, the tax would help the industry to increase its competitiveness with
foreign manufacturers by making the U.S. market a more attractive place in which to
sell small, highly fuel efficient cars; and would help to ensure the continued existence
of domestic manufacturing facilities. Finally, the enactment of a phase-in tax could
diffuse the negative effects of a future unanticipated jump in the world price of oil by
raising the real price of fuel in this country above the current world price of oil, thus
partially insulating the economy from future price shocks. Given that world oil prices
will ultimately rise, a phase-in tax which encourages domestic manufacturers to develop
higher fuel economy vehicles would be a sound insurance policy for the industry.
The second major group of industries that would be affected by a highway fuel tax are
auto travel related industries. A highway fuel tax will negatively affect auto travel
related industries by reducing vehicle miles traveled. Among the affected industries
are motor vehicle dealers, other auto and accessory dealers, auto repair services,
gasoline service stations, restaurants, and hotels and other lodging establishments.
Previous analysis indicates that a 1 percent reduction in VMT could reduce gross
product originating in these sectors by 0.43 percent.1
Exhibit 16 presents estimated VMT for each scenario as a percentage of baseline VMT.
The results show that the reduction in VMT in the period between 1989 and 1991 is less
when the tax is phased in than when it is a shock tax. For example, under a $0.40 shock
tax annual VMT will average only 92 percent of baseline between 1989 and 1991,
whereas under a $0.40 phase-in tax annual VMT will average 95 percent of baseline.
Thus, auto travel related industries will suffer less under a phase-in tax than under a
shock tax between 1989 and 1991.
*Jack Faucett Associates, Potential Economic Impacts of a Partial Oil Embargo.
October 10, 1978.
44
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EXHIBIT 16;
PERCENTAGE OF BASELINE VMT BY SCENARIO
40
-------
Furthermore, the greater the level of fuel economy elicited by the tax, the smaller the
effect of a given tax on auto travel related industries. For example, VMT will equal 94
percent of baseline in 1989 under a $0.40 phase-in tax if there is no improvement in fuel
economy; but it will equal 97 percent of baseline \{ fuel economy adjusts completely to
the tax.
46
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VII. CONCLUSIONS
A $0.40 or a $0.70 highway fuel tax will reduce real GNP slightly between 1987 and
1991 if the Federal government uses the net tax revenues to reduce the projected
Federal budget deficit; and if the deficit reduction does not stimulate economic growth.
Civilian unemployment will increase marginally, and consumer prices will be 1.4
percent ($0.40 tax) or 2.8 percent ($0.70 tax) higher in 1991 than they would have been
in the absence of a tax. Domestic oil imports will fall significantly under all of the tax
options, improving the nation's balance of payments position.
The net revenues collected by the Federal government from these taxes, however, are
sufficient to offset the projected reductions in real GNP through increased Federal
spending, and to simultaneously reduce the Federal budget deficit significantly. If the
Federal government chooses to maintain real GNP at pre-tax levels, civilian unemploy-
ment will not change. (In fact, the government could expand economic activity and
employment by spending more than the amount required to maintain real GNP at
pre-tax levels.) For example, assuming 50 percent fuel economy adjustment and a
Federal government expenditure multiplier of one, the net tax revenues from a phased-
in $0.40 tax would be sufficient to allow the expenditure of $43 billion between 1987
and 1991 to maintain baseline real GNP, and to permit a reduction of $42 billion in the
Federal budget deficit for the period. U.S. oil imports would fall by 940 million barrels
(an average of 500,000 barrels per day) during these five years, improving the balance
on current account by over $33 billion. Employment would not be affected since
baseline real GNP would be held constant. The only negative impacts would be an
increase in consumer prices of 1.8 percent and a 6 percent drop in vehicle miles
travelled. Since the economic effects of the other tax scenarios analyzed in this report
are also favorable (although the magnitudes of the impacts vary according to tax level,
implementation schedule, and assumed fuel economy adjustment), a highway fuel tax
appears to be an attractive policy option from the perspective of its macroeconomic
impacts.
Comparison of the macroeconomic effects of a shock tax with those of a phase-in tax
establishes that the phase-in tax is preferable as a tax policy instrument. Although the
shock tax affects consumer prices the same as the phase-in tax, and it raises about the
same revenue, the phase-in tax has less severe macroeconomic impacts in all other
areas. The benefits of the phase-in tax are due primarily to the fact that fuel economy
improvements are more likely to occur, and to occur sooner, under a phase-in tax than
a shock tax because consumers and motor vehicle manufacturers are aware of the tax
earlier and hence have longer lead times to adjust. These benefits are summarized
below: 47
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Real GNP will decline less if the tax is phased-in over the period from
1987 through 1991 than if it is levied at its full level in 1989, assuming
that the Federal government does not reverse the fall in real GNP.
If a portion of the tax revenues are used to offset the reduction in real
GNP caused by a highway fuel tax, the funds available to reduce the
Federal budget deficit will be much greater if the tax is phased-in than if
it is levied at its full level in 1989.
The improvement in the nation's balance of payments position and the
reduction of any existing trade deficit will be greater if the tax is
phased-in because the reduction in oil imports will be greater under the
phase-in. tax. than, the shock tax. This is tvacavise conservation occurs
sooner and is greater under a phase-in tax than under a shock tax.
Assuming that all Federal tax revenues are used to reduce the budget
deficit and not to maintain real GNP, the increase in civilian unemploy-
ment will be less under the phase-in tax than under the shock tax.
The phasing in of a highway fuel tax will shift the burden of the tax away
from domestic consumers and toward foreign oil suppliers and the
domestic oil refining industry by increasing the share of direct revenues
effectively contributed by them.
The phasing in of a highway fuel tax will give motor vehicle manufac-
turers time to prepare for and to adjust to the future higher price of fuel.
Furthermore, the phase-in tax will insulate the domestic auto industry
from external oil price shocks which could disrupt the domestic market,
giving them a more stable operating environment. Finally, it will
encourage domestic manufacturers to invest in more fuel efficient
vehicle;:t increasing their competitiveness with foreign manufacturers of
small, fuel efficient autos.
In summary, the analyses presented in this ;sport strongly suggest two very important
conclusions. First, a highway fuel tax can be a favorable public policy option. Properly
designed and implemented, a highway fuel tax could reduce the large Federal budget
and trade deficits without affecting GNP and unemployment and with only small
impacts on consumer prices and vehicle miles travelled. Second, the phasing-in of a
highway fuel tax is preferable to a one-time, unexpected shock tax from nearly every
economic perspective.
48
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APPENDIX A
SUMMARY OF METHODOLOGY USED TO PROJECT
THE MACROECONOMIC IMPACTS OF HIGHWAY FUEL TAXES
The macroeconomic impacts of the highway fuel tax options presented in the text of
this report were estimated over the period from 1987 through 1991 for the phase-in tax;
and from 1989 through 1991 for the shock tax. Changes from baseline projections were
estimated for real gross national product (GNP); Federal government revenues and the
budget deficit; oil imports and the balance of payments; the civilian unemployment
rate; and the level of consumer prices. This appendix summarizes the methodologies
used to project changes in the key variables of this analysis.
A. Baseline Estimates
Baseline projections of real GNP, Federal government revenues, outlays, and the unified
budget deficits, the civilian unemployment rate, and the level of consumer prices
between 1986 and 1989 were taken from the Congressional Budget Office's mid-growth
economic scenario.* Projections for 1990 and 1991 were derived by Jack Faucett
Associates by extending these CBO projections through 1991, using conservative
assumptions about the future levels of each variable. Baseline projections of oil
imports were taken from the U.S. Department of Energy's 1982 Annual Energy Outlook,
middle world oil price scenario.
The baseline projection of annual fuel consumption of 100 billion gallons by highway
vehicles reflects the average of several projections of annual highway fuel consumption
for 1986 through 1990 made by the U.S. Department of Energy.^ Class 8 fuel
consumption was projected to be 8 percent of this amount (8 billion gallons), given DOE
projections of heavy-duty truck fuel consumption and estimates of heavy-heavy truck
fuel consumption made by Argonne National Laboratory. Since Class 8 vehicles are
exempt from the proposed taxes, baseline taxable highway fuel consumption equals 92
billion gallons per year.
1 Congressional Budget Office, The Economic Outlook: A Report to the Senate and
House Committees on the Budget, February 1984. Chapter I: The Economic Outlook,
pp. 1-18.
2
U.S. Department of Energy, 1982 Annual-Energy Outlook, April 1983. Tables A.4.4,
B.4.4, and C.4.4.
3
M. Millar et. al., Baseline Projections of Transportation Energy Consumption by Mode:
1981 Update. Argonne National Laboratory, April 1982, p. 146.
-------
Total annual taxable highway fuel consumption under the phase-in scenario was divided
among vehicles purchased between 1986 and the analysis year, and surviving vehicles
from the 1985 fleet. Similarly, total annual taxable highway fuel consumption under
the shock scenario was divided among vehicles purchased between 1989 and the analysis
year, and surviving vehicles from the 1988 fleet. (These vehicles are identified as new
or old vehicles, respectively, in the remaining discussion and appendices.) The
scrappage and sales rates and rules identified in the text were used to determine the
annual distribution of the motor vehicle fleet and fuel consumption among these two
categories for each implementation scenario.
Finally, annual fuel consumption in gallons was converted to barrels by dividing by 42
gallons of fuel per barrel. Thus, baseline petroleum fuel consumption by highway
vehicles in the United States equals 2.4 billion barrels per year, or 6.5 million barrels
per day.
B. Changes in Highway Fuel Consumption and VMT
The initial impact of each highway fuel tax scenario is to reduce annual highway fuel
consumption. This happens in several ways. First, the higher cost of highway fuel
induces conservation among drivers who do not operate more fuel efficient motor
vehicles after the imposition of the tax. Assuming an own-price elasticity of demand of
-0.3 for gasoline and diesel fuel,* a 10 percent increase in fuel price, and thus a 10
percent increase in real fuel cost per mile, causes fuel consumption and vehicle miles
traveled (VMT) to fall 3 percent among these operators. This may be called price-
induced fuel conservation.
Second, fuel conservation occurs among drivers who purchase new vehicles with
sufficient fuel economy to keep their real fuel cost per mile constant following
imposition of a highway fuel tax. For example, a driver can keep real fuel cost per mile
constant if fuel price increases by 10 percent by driving a vehicle that is 10 percent
more fuel efficient (in terms of miles per gallon). This driver will be able to keep VMT
constant while reducing fuel consumption by 9.1 percent. This may be called
technology-induced fuel conservation.
^.S. Department of Energy, Price Elasticities of Demand for Motor Gasoline and Other
Petroleum Products, May 1981.
50
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Third, fuel conservation occurs among drivers who purchase more fuel efficient vehicles
but who are not able to keep real fuel cost per mile constant. In this case, the
reduction in fuel consumption is due to both price-induced and technology-induced
factors. For example, a 10 percent increase in fuel price causes a 5 percent increase in
real fuel cost per mile if vehicle fuel efficiency improves by approximately 4.8 percent.
The total reduction in fuel consumption, then, equals 4.8 percent of the original
consumption (technology-induced conservation); plus 1.5 percent {-0.3 times 5 percent)
of the level of consumption (equal to 95.2 percent of baseline consumption) required to
keep VMT constant at the new level of fuel efficiency (price-induced conservation).
This yields a reduction in fuel consumption of about 6.2 percent below baseline levels;
and a drop in VMT o( 1.5 percent. This may called price/technology-induced fuel
conservation.
These methods were used to estimate the impact on fuel consumption and VMT of the
highway fuel tax options. Price-induced fuel conservation and VMT reduction were
calculated for the old vehicles in each year of each scenario; and for the new vehicles
under the No FE scenarios. Technology-induced fuel conservation was calculated for
the new vehicles in each year of the Full FE scenarios; and for the new vehicles in those
years in the 1/2 FE scenarios where the Improvement in fuel economy exceeds the
increase in fuel price. Finally, price/technology-induced fuel conservation and VMT
reduction were calculated for the new vehicles in those years in the 1/2 FE scenarios
where the improvement in fuel economy is less than the increase in fuel price. Total
annual fuel conservation and VMT reduction equal the sum of the appropriate
components for each scenario.
C. Changes in Oil Imports
It is likely that any reduction in domestic demand for highway fuel will be directly
reflected in lower petroleum imports. This analysis assumes that petroleum imports
decrease one barrel for every barrel reduction in highway fuel consumption.^ The
annual value of these reduced petroleum imports equals the annual reduction in highway
fuel consumption (in barrels) multiplied by $33 per barrel.
^This is a conservative assumption. The actual reduction will depend upon demand and
supply considerations for petroleum products other than highway fuel.
9
The total value of reduced imports equals the value of reduced petroleum imports plus
the value of reduced imports of other goods and services, as described in the next
section.
51
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D. Changes in Real GNP
A highway fuel tax affects real GNP in several ways. By increasing the level of
indirect business taxes collected by the Federal government, the tax reduces personal
income and personal consumption expenditures, depressing GNP. To determine the
magnitude of this effect, a comparative static analysis of the change in real GNP due
to increased Federal indirect business taxes was conducted using a macroeconomic
model from the Bureau of Labor Statistics.1 This analysis showed that a $1 increase in
real indirect business taxes will reduce real GNP by $0.78. This factor was used with
estimates of net increased indirect business tax revenues due to the highway fuel tax to
o
determine the resultant impact on real GNP.
A highway fuel tax affects real GNP positively by reducing imports of oil and other
foreign goods and services. As noted above, the reduction in the value of annual oil
imports is calculated by projecting the reduction in annual highway fuel consumption in
barrels and multiplying by $33 per barrel. The improvement in annual real GNP due to
reduced oil imports equals this amount. The reduction in imports of other goods and
services reflects the reductions in personal income and personal consumption expendi-
tures attributed to the increased level of Federal indirect business taxes. A compara-
tive static analysis of the change in imports due to increased indirect business taxes
using the BLS macro model shows that a $1 increase in these taxes causes imports to
fall, and GNP to increase, by about $0.03. Thus, the total improvement in GNP
attributed to reduced imports equals the sum of the value of reduced oil imports and
the value of reduced imports of other goods and services.
The reduction in oil imports also has a negative effect on real GNP, however, if those
imports were refined into motor fuel in the United States. Historic data shows that the
3
domestic refining of a barrel of oil adds $4.37 (1983 dollars) to real GNP. Thus, real
GNP is estimated to fall $4.37 for each barrel of oil no longer imported into the United
States.
1U.S. Department of Labor, Bureau of Labor Statistics, BLS Economic Growth Model
System Used for Projections to 1990, April 1982.
2
See Sections E and F of this appendix for a discussion of changes in indirect business
taxes.
3
U.S. Department of Commerce, Bureau of Economic Analysis. Unpublished data on
gross product originating by BEA sector, 1983; and data on refinery input and output
from the U.S. Department of Energy, 1982 Annual Energy Review, Tables 24, 28 and 29.
52
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Finally, data suggest that real GNP falls by 0.02 percent for every percentage decrease
in total domestic energy usage (in quads) attributed to price-induced fuel conservation
and reduced VWT in the highway sector.1 This is a relatively minor impact, however:
the largest percentage reduction in domestic energy usage due to price-induced
conservation is approximately 2.2 percent, yielding a reduction in real GNP of .04
percent.
E. Changes in Federal Revenues and the Budget Deficit
A highway fuel tax affects Federal tax revenues in several ways. First, the tax raises
new direct highway fuel tax revenues in each year equal to the level of the tax
multiplied by taxable fuel consumption. Second, the tax lowers highway fuel tax
revenues by an amount equal to the number of taxable gallons no longer sold multiplied
by the current Federal highway fuel tax of $0.09 per gallon. Net additional highway
fuel tax revenues equal direct tax revenues less this amount; since the demand for
highway fuel is inelastic, however, Federal highway fuel tax revenues will increase.
Third, the reduction in real economic activity as a result of the tax causes other
Federal tax collections to fall. Analysis of CBO projections extended through 1991
indicates that a one percent decrease in real GNP reduces Federal revenues by 1.06 to
1.17 percent, depending upon the year in question. The net effect of the tax on
Federal revenues presented in Exhibit 6 in this analysis equals the sum of these three
effects.
These net additional revenues may be used to reduce the Federal budget deficit. The
potential reduction, however, is less than the total net additional revenues. The
slowdown in economic activity resulting from the highway fuel tax causes the Federal
government to increase expenditures on items such as unemployment and welfare
payments. Analysis of CBO projections extended through 1991 shows that Federal
government outlays increase by 0.16 to 0.30 percent for every one percent reduction in
3
real GNP, depending upon the year in question. Thus the annual potential reduction in
the Federal budget deficit equals net additional revenues minus the additional outlays
calculated using these elasticities.
*U.S. Department of Energy, 1982 Annual Energy Outlook, April 1983. Tables A.1.3,
B.1.3, E.1.3.
2
CBO, op. cit.
3Ibid.
53
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F. Changes in Indirect Business Taxes
The annual increase in indirect business taxes used to project the annual change in real
GNP equals net additional Federal highway fuel tax revenues minus the highway fuel
tax revenues no longer collected by state and local governments due to the reduced
consumption of taxable fuel. The latter amount equals the number of taxable gallons no
longer sold multiplied by $0.11 per gallon, the average state and local highway fuel
tax.*
G. Changes in Civilian Unemployment
Civilian unemployment increases as real GNP falls. Analysis of CBO projections
extended through 1991 indicates that the civilian unemployment rate increases by 5.5
percent to 6.3 percent for every one percent decrease in real GNP, depending upon the
2
year in question. These elasticities were used to calculate the annual change in
civilian unemployment and the new civilian unemployment rate due to the changes in
real GNP caused by the highway fuel tax options.
H. Changes in the Level of Consumer Prices
A tax on highway fuel increases consumer prices by increasing the cost of fuel directly
consumed, and by increasing the cost of other final goods and services which have
taxable highway fuel as an input. It decreases consumer prices, however, by reducing
economic activity and hence the underlying pressure on prices.
The resultant effects on consumer prices were projected by constructing a consumer
price index for each scenario. Each index consisted of three components: highway fuel
directly purchased by consumers; taxable highway fuel which is an input into other final
goods and services; and the remaining portion of other final goods and services. The
initial relative importance factors used to calculate the index (where 1986 = 100) were
*"State Fuel Taxes on the Rise in 1984." Fleet Owner; Small Fleet Edition, March 1984,
p. 14.
2
CBO, op. cit.
54
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5.866 for fuel directly consumed and 94.134 for other final goods and services, including
input fuel. The latter relative importance factor was divided into 0.188 for input fuel
and 93.946 for the remainder of other final goods and services, using a JFA estimate
that taxable highway fuel (as defined in this analysis) currently constitutes about 0.2
percent of the cost of other final goods and services. Consumer price indices were
calculated for each year by multiplying these initial factors by the projected year-to-
year changes in prices for that component of the index, and then by summing these
components together. Division of the resultant annual index by the baseline index
produced an estimate of the increase in consumer prices in that year due to the highway
fuel tax.
Year-to-year price changes for the other final goods and services component equaled
projected baseline changes reduced by the effect of lower economic activity on the
underlying pressure on prices. Year-to-vear changes in the fuel component equaled the
underlying year-to-year change in consumer prices (equal to that used for the other
final goods and services component) multiplied by the increase in the real cost of fuel
due to the highway fuel tax. Thus, if in a given year the underlying inflation rate were
2 percent and the tax raised the real price of fuel by 5 percent, the overall increase in
the price of fuel over the previous year was 7.1 percent.
I. Distribution of Direct Tax Revenues Among Alternative Sources
The following methodology was used to distribute direct tax revenues among consumers,
foreign oil suppliers, the domestic oil refining industry, state and local governments,
and the Federal government:
Total direct tax revenues were calculated for the period from 1987
through 1991 as the sum of annual direct tax revenues.
Consumers were estimated to provide an amount equal to their toted
expenditure on fuel during the period after implementation of a new tax
minus their total expenditure on fuel if the tax had not been implemented.
Foreign oil suppliers were estimated to provide an amount equal to the
price of imported oil ($33 per barrel) multiplied by the number of barrels
no longer imported over the period.
^.S. Department of Labor, Bureau of Labor Statistics, CPI Detailed Report March
1984.
-------
The Federal government was estimated to provide an amount equal to the
tax revenues no longer collected due to the higher tax (equal to $0.09 per
gallon multiplied by the number of gallons no longer sold).
State and local governments were estimated to provide an amount equal
to the tax revenues no longer collected due to the higher tax (equal to
$0.11 per gallon multiplied by the number of gallons no longer sold).
"Hie domestic oil refining industry was estimated to provide an amount
equal to total direct tax revenues minus the contribution of the other four
sectors.
56
-------
APPENDIX B
ADDITIONAL TABLES FOR GNP/OIL IMPORTS/BALANCE OF PAYMENTS ANALYSES
57
-------
SHOCK SCENARIO - 40* TAX - NO ADJUSTMENT
IN FUEL ECONOMY MACRO EFFECTS
Baseline GNP
(billions of 1983 $)
1989
1990
4,161.0 4,298.0
1991
4,440.0
1. Effect of Increase in Indirect
Business Taxes
(24.7)
(24.7)
(24.7)
2. Reduced Oil Imports
6,7
6.7
6.7
3. Reduced Imports
4. Reduced Crude Refining
5. Reduced Energy Usage
TOTAL CHANGE
0.9
(0.9)
(1.1)
(19.1)
0.9
(0.9)
(1.1)
(19.1)
0.9
(0.9)
(1.1)
(19.1)
NEW GNP
% CHANGE IN GNP
4,141.9 4,278.9
(0.46)
(0.44)
4,423.9
(0.43)
53
-------
SHOCK SCENARIO - 40* TAX -NO ADJUSTMENT IN FUEL ECONOMY
Level of Tax
(1983 $/gallon)
Base Price (1983$)
% Change in Price
% Change in Fuel Demand
Taxable Highway Fuel
Consumption (billions of gallons)
Fuel Tax Revenues - New Tax
(billions of 1983 $)
Fuel Tax Revenues - Old Tax
Federal
State
Net Tax Revenue
Reduced Oil Imports
(billions of barrels)
Value of Reduced Oil
Imports (billions of 1983 $)
Reduced Energy Usage (Quads)
% Change in Energy Usage
1989 1990 1991
0.40 0.40 0.40
1.30 1.30 1.30
30.77 30.77 30.77
9.23 9.23 9.23
83.51 83.51 83.51
33.40 33.40 33.40
(0.76) (0.76) (0.76)
(0.93) (0.93) (0.93)
31.71 31.71 31.71
202.18 202.18 202.18
6.67 6.67 6.67
1.08 1.08 1.08
1.27 1.27 1.27
59
-------
SHOCK SCENARIO - 40* TAX
FULL FUEL ECONOMY ADJUSTMENT -
MACRO EFFECTS
1989
1990
1991
Baseline GNP
(billons of 1983 $)
4,161.0
4,298.0
4,440.0
1. Effect of Increase in
Indirect Business Taxes
(24.0)
(23.4)
(22.7)
2. Reduced Oil Imports
7.8
8.9
10.0
3. Reduced Imports
0.9
0.9
0.8
4. Reduced Crude Refining
tl.O)
U.2)
11.3)
5. Reduced Energy Usage
(0.9)
(0.9)
(0.8)
TOTAL CHANGE
(17.2)
(15.7)
(14.0)
NEW GNP
4,143.8
4,282,3
4,426.0
% CHANGE IN GNP {0.41) (0.37) (0.32)
60
-------
SHOCK SCENARIO - m TAX
PULL FUEL ECONOMY ADJUSTMENT
Level of Tax
Highway Fuel Demand
(taxable billions of gallons)
Fuel Tax Revenues - New Tax
(billions of 1983 $)
Fuel Tax Revenues - Old Tax
Federal
State
Met Tax Revenues
Reduced Oil Imports
(millions of barrels)
Value of Reduced Oil Imports
(at $33/barrel, billions of 1983 $)
19B9 1990 1991
<3.40 0.40 0.40
82.09 80.74 79.30
32.84 32.30 31.72
(0.89) (1.01) (1.14)
(1.09) (1.24) (1.40)
30.86 30.05 29.18
235.95 268.10 302.38
7.79 8.85 9.98
61
-------
SHOCK SCENARIO - 401 TAX
FULL FUEL ECONOMY ADJUSTMENT
Original Highway Fuel Consumption
1. Vehicles not replaced
2. Vehicles replaced
(billions of gallons)
New Fuel Consumption
1. Old
2. New
3. Total
Change in Fuel Consumption
for Macro Analysis
(billions of gallons)
Reduced Energy Usage (Quads)
% Change in Energy Usage
1989 1990 1991
92.00 92.00 92.00
82.08 72.68 62.56
9.92 19.32 29.44
74.50 65.97 56.79
7.59 14.77 22.51
82.09 80.74 79.30
7.58 6.71 5.77
0.96 0.85 0.73
1.14 1.00 0.86
62
-------
SHOCK SCENARIO - 40* TAX - 50 PERCENT OF FULL FUEL ECONOMY ADJUSTMENT
1989 1990 1991
Baseline GNP - 1983 $ (billions) 4,161.0 4,298.0 4,440.0
1. Effect of Increase In Indirect (24.3) (24.1} (23.7)
Business Taxes
2. Reduced Oil Imports 7.2 7.7 8.2
3. Reduced Imports 0.9 0.9 0.9
4. Reduced Crude Refining (1.0) (1.0) (l.l)
5. Reduced Energy Usage (1.0) (1.0) (0.9)
TOTAL CHANGE (18.2) (17.5) (16.6)
NEW GNP 4,142.8 4,280.5 4, 423 .4
% CHANGE IN GNP (0.44) (0.41) (0.37)
fi.i
-------
SHOCK SCENARIO - 40* TAX - 50 PERCENT OF PULL FUEL ECONOMY ADJUSTMENT
Level of Tax
Highway Fuel Demand
(Taxable, billions of gallons)
Fuel Tax Revenues - New Tax
(billions of 1983 $)
Fuel Tax Revenues - Old Tax
1. Federal
2. State
Net Tax Revenues
Reduced Oil Imports
(millions of barrels)
Value of Reduced Oil Imports
(at $33/barrel, billions of 1983 $)
1989 1990 1991
0.40 0.40 0.40
82.85 82.23 81.57
33.14 32.89 32.63
(0.82) (0.88) (0.94)
(1.01) (1.07) (1.15)
31.31 30.94 30.54
217.86 232.62 248.33
7.19 7.68 8.20
64
-------
SHOCK SCENARIO - 40* TAX - 50 PERCENT OF FULL FUEL ECONOMY ADJUSTMENT
Original Highway Fuel Consumption
1. Vehicles not replaced
2. Vehicles replaced
(billions of gallons)
New Fuel Consumption
1. Old
2. New
3. Total
Change in Fuel Consumption for
Macro Analysis (billions of gallons)
1. Old
2. New
3. Total
Reduced Energy Usage (Quads)
% Change in Energy Usage
19B9 1990 1991
92.00 92.00 92.00
82.08 72.68 62.56
9.92 19.32 29.44
74.50 65.97 58.79
8.35 16.26 24.78
82.85 82.23 81.57
7.58 6.71 5.77
0.40 0.78 1.20
7.98 7.49 S.97
1.01 0.95 0.89
1.19 1.12 1.04
65
-------
SHOCK SCENARIO - 70t TAX
NO ADJUSTMENT IN FUEL ECONOMY -
MACRO EFFECTS
1989
1990
1991
Baseline GNP
(billons of 1983 %)
4,161.0
4,298.0
4,440.0
1. Effect of Increase in
Indirect Business Taxes
(39.7)
(39.7)
(39.7)
2. Reduced Oil Imports
11-7
11.7
11.7
3. Reduced Imports
1.5
1.5
1.5
4. Reduced Crude Refining
(1.5)
(1.5)
(1.5)
5. Reduced Energy Usage
(2.0)
(2.0)
(2.0)
TOTAL CHANGE
(30.0)
(30.0)
(30.0)
NEW GNP
4,131.a
4,2SS.0
4,410.9
% CHANGE IN GNP
(0.72)
(D .70)
(o.sb:
66
-------
SHOCK SCENARIO - 70* TAX
NO ADJUSTMENT IN FUEL ECONOMY
Level of Tax
(1983 $/gallon)
Base Price (1983 $)
% Change in Price
% Change in Fuel Demand
Taxable Highway
Fuel Consumption
(billions of gallons)
Fuel Tax Revenues - New Tax
(billions of 1983 $)
Reduced Oil Imports
(millions of barrels)
Value of Reduced Oil Imports
(billions of 1983 $)
Reduced Energy Usage (Quads)
% Change in Energy Usage
Fuel Tax Revenues - Old Tax
Federal
State
Net Tax Revenue
1989 1990 1991
0.70 0.70 0.70
1.30 1.30 1.30
53.85 53.85 53.85
16.15 16.15 16.15
77.14 77.14 77.14
54.00 54.00 54.00
353.76 353.76 353.76
11.67 11.67 11.67
1.89 1.89 1.89
2.22 2.22 2.22
(1.34) (1.34) (1.34)
(1.63) (1.63) (1.63)
51.03 51.03 51.03
n
-------
SHOCK SCENARIO - 70* TAX -
FULL FUEL ECONOMY ADJUSTMENT - MACRO EFFECTS
Baseline GNP - 1983 $ (billions)
1989
1990
4,161.0 4,298.0
1991
4,440.0
1. Effect of Increase in Indirect
Business Taxes
(38.4)
(37.1)
(35.8)
2. Reduced Oil Imports
13.1
14.5
16.0
3. Reduced Imports
1.4
1.4
1.3
4. Reduced Crude Refining
(1.7)
(1.9)
(2.1)
5. Reduced Energy Usage
(1.6)
(1.5)
(1.3)
TOTAL CHANGE
(27.2)
(24.6)
(21.9)
NEW GNP
4,133.8 4,273.4
4,418.1
% CHANGE IN GNP
(0.65)
(0.57)
(0.49)
68
-------
SHOCK SCENARIO - 70* TAX -
FULL FUEL ECONOMY ADJUSTMENT
Level of Tax
Highway Fuel Demand (taxable
billions of Gallons)
Fuel Tax Revenues - New Tax
(billions of 1983 $)
Fuel Tax Revenues - Old Tax
Federal
State
Net Fuel Tax Revenues
Reduced Oil Imports
(millions of Barrels)
Value of Reduced Oil Imports
(at $33/barrel, billions of 19B3 $)
1989 1990 1991
0-70 0.70 0.70
75.27 73.50 71.59
52.69 51.45 50.11
(1.51) (1.67) (1.84)
(1.84) (2.04) (2.25)
49.34 47.74 46.02
393.33 440.48 435.95
13.14 14.54 16.04
Ail
-------
SHOCK SCENARIO - 70* TAX - FULL FUEL ECONOMY ADJUSTMENT
Original Highway Fuel Consumption
1. Vehicles not replaced
2. Vehicles replaced
(billions of gallons)
New Fuel Consumption
1. Old
2. New
3. Total (billions of gallons)
Change in Fuel Consumption
for Macro Analysis
(billions of gallons)
Reduced Energy Usage (Quads)
% Change in Energy Usage
1989 1990 1991
92.00 92.00 92.00
82.08 72.68 62.56
9.92 19.32 29.44
68.82 60.94 52.45
6.45 12.56 19.14
75.27 73.50 71.59
13.18 11.74 10.11
1.68 1.49 1.29
1.98 1.75 I.51
70
-------
SHOCK SCENARIO - 70* TAX - 50 PERCENT OF FULL
FUEL ECONOMY ADJUSTMENT - MACRO EFFECTS
1989
1990
1991
Baseline GNP - 1983 $ (billions)
4,161.0 4,298.0
4,440.0
1. Effect of Increase in Indirect
Business Taxes
(39.1)
(38.6)
(38.0)
2. Reduced Oil Imports
12.3
12.9
13.5
3. Reduced Imports
1.4
1.4
1.4
4. Reduced Crude Refining
(1.6)
(1.7)
(1.8)
5. Reduced Energy Usage
(1.7)
(1.7)
(1.6)
TOTAL CHANGE
(28.7)
(27.7)
(26.5)
NEW GNP
4,132.3 4,270.3
4,413.5
% CHANGE IN GNP
(0.69)
(0.64)
(0.60)
71
-------
SHOCK SCENARIO - 70* TAX - 50 PERCENT OF FULL FUEL ECONOMY ADJUSTMENT
1989
1990
1991
Level of Tax
0.70
0.70
0.70
Highway Fuel Demand (taxable,
billions of gallons)
76.34
75.59
74.78
Fuel Tax Revenues - New Tax
(billions of 1983 $)
53.44
52.91
52.35
Fuel Tax Revenues - Old Tax
Federal
State
(1.41)
(1-72)
(1.48)
(1.81)
(1.55)
(1.89)
Net Fuel Tax Revenues
50.31
49.62
48.91
Reduced Oil Imports
(millions of barrels)
372.86
390.71
410.00
Value of Reduced Oil Imports
(billions of 1983 $)
12.30
12.89
13.53
2
-------
SHOCK SCENARIO - 70* TAX - 50 PERCENT OF FULL FUEL ECONOMY ADJUSTMENT
Original Highway Fuel Consumption
1. Vehicles not replaced
2. Vehicles replaced
(billions of gallons)
New Fuel Consumption
1. Old
2. New
3. Total
Change in Fuel Consumption for
Macro Analysis
1. Old
2. New
3. Total
Reduced Energy Usage (Quads)
% Change in Energy Usage
1989 1990 1991
92.00 92.00 92.00
82.08 72.68 62.56
9.92 19.32 29.44
68.82 60.94 52.45
7.52 14.65 22.33
76.34 75.59 74.78
13.18 11.74 10.11
0.66 1.28 1.96
13.84 13.02 12.07
1.76 1.66 1.53
2.07 1.95 1.81
-------
PHASE IN SCENARIO - 40
-------
PHASE IN SCENARIO - 40
-------
PHASE IN SCENARIO - 40* TAX - FE 1986 FULL FUEL ECONOMY ADJUSTMENT - MACRO EFFECTS
1987
1988
1989
1990
1991
Baseline GNP - 1983 $
(billions)
1. Effect of Increase In Indirect
Business Taxes - Federal
2. Reduced Oil Imports
3. Reduced Imports
4. Reduced Crude Refining
5. Reduced Energy Usage
TOTAL CHANGE
NEW GNP
% CHANGE IN GNP
3,892.0
(4.4)
4.6
0.2
(0.6)
(0.2)
(0.4)
3,891.6
(0.01)
4,026.0
(8.9)
7.3
0.3
(1.0)
(0.3)
(2.6)
4,023.4
(0.06)
4,161.0
(13.0)
9.5
0.5
(1.3)
(0.4)
(4.7)
4,156.3
(0.11)
4,298.0
(17.1)
11.2
0.6
(1.5)
(0.4)
(7.2)
4,290.8
(0.17)
4,440.0
(21.0)
12.9
0.8
(1.7)
(0.5)
(9.5)
4,430.5
(0.21)
-------
PHASE IN SCENARIO - 40* TA
1 f)B7
Level of Tax 0.06
Highway Fuel Demand 86.11
(TaxableKBillions of Gallons)
Fuel Tax Revenues - New Tax 6.89
(billions 1983 $)
Fuel Tax Revenues - Old Tax
Federal (0.09/gallon) (0.53)
Local (0.1 l/gallon) (0.65)
Net Tax Revenues 5.71
Reduced Oil Imports 140.24
(millions of barrels)
Value of Reduced Oil Imports 4.63
(at $33/barrel, billions of 1983 $)
FE 1986 FULL FUEL ECONOMY ADJUSTMENT
inan
0.\6 0.24
82.76 79.95
13,24 19.19
J990__ 1991
0.1"2 0.40
77.79 75.61
24.89 30.24
(0-83)
(1,02)
11.39
220.00
(1.08)
(1.33)
16.78
286.90
(1.28)
(1.56)
22.05
338.33
(1.48)
(1.80)
26.96
390.24
7.26
9.47
11.17
12.88
-------
PHASE IN SCENARIO - 40
-------
PHASE IN SCENARIO -
40$ TAX -
50 PERCENT OF
1986 FE FUEL ECONOMY ADJUSTMENT
1987
1988
1989
1990
1991
Baseline GNP - 1983 $ (billions)
3,892.0
4,026.(1
4,161.0
4,298.0
4,440.0
1. Effect of Increase In Indirect
Business Taxes
(4-9)
(9.8)
(14.4)
(18.8)
(22.9)
2. Reduced Oil Imports
2.8
4.5
6.3
7.9
9.5
3. Reduced Imports
0.2
0.4
0.5
0.7
0.8
4. Reduced Crude Refining
(0.4)
(0.6)
(0.8)
(1.0)
(1.3)
5. Reduced Energy Usage
(0.2)
(0.3)
(0.4)
(0.6)
(0.7)
TOTAL CHANGE
(2.5)
(5.8)
(8.8)
(11.8)
(14.6)
NEW GNP
3,889.5
4,020.2
4,152.2
4,286.2
4,425.4
% CHANGE IN GNP
(0.06)
(0.14)
(0.21)
(0.27)
(0.33)
-------
PHASE IN SCENARIO
Level of Tax
Highway Fuel Demand
(taxable, billions of dollars)
Fuel Tax Revenues - New Tax
(billions 1983 $)
Fuel Tax Revenues - Old Tax
1. Federal
2. State
Net Tax Revenues
Reduced Oil Imports
(millions of barrels)
Value of Reduced Oil Imports
(at $33/barrel, billions of 1983 $)
40* TAX - 50 PERCENT OF 1986 FE FUEL ECONOMY ADJUSTMENT
1987
0.08
88.39
7.07
(0.32)
(0.40)
6.35
85.95
2.84
1988
0.16
86.23
13.80
(0.52)
(0.63)
12.65
137.38
4.53
1989
0.24
84.03
20.17
(0.72)
(0.88)
18.57
189.76
6.26
1990
0.32
81.99
26.24
(0.90)
(1.10)
24.24
238.33
7.87
1991
0.40
79.86
31.94
(1.09)
(1.34)
29.51
289.05
9.54
-------
PHASE IN SCENARIO - 404 TAX
19B7
Original Highway Fuel Cosnumption 92.00
1. Vehicles not replaced 72.68
2. Vehicles replaced 19.32
(billions of gallons)
New Fuel Consumption
1. Old 71.34
2. New 17.05
3. Total 88.39
Change in Fuel Consumption for
Macro Analysis
1. Old 1.34
2. New 0
3. Total 1.34
Reduced Energy Usage (Quads) 0.17
% Change in Energy Usage 0.20
50 PERCENT OF 1986 FE FUEL ECONOMY ADJUSTMENT
1988
92.00
62.56
29.44
1989
92.00
53.36
38.64
1990
92.00
46.00
46.00
1991
92.00
36.80
55.20
60.25
25.98
86.23
50.40
33.63
84.03
42.61
39.38
81.99
33.40
46.46
79.86
2.31
0
2.31
0.29
0.35
2.96
0.46
3.42
0.43
0.51
3.39
1.21
4.60
0.58
0.69
3.40
2.25
5.65
0.72
0.84
-------
PHASE IN SCENARIO - 70
-------
PHASE IN SCENARIO - 70
-------
PHASE IN SCENARIO - 70t TAX - FE 1986 FULL FUEL ECONOMY ADJUSTMENT - MACRO EFFECTS
1987
Baseline GNP - 1983 $ 3,892.0
(billions)
1. Effect of Increase in Indirect Business (7.6)
Taxes - Fed
2. Reduced Oil Imports 7.2
3. Reduced Imports 0.3
4. Reduced Crude Refining (0.9)
5. Reduced Energy Usage (0.3)
TOTAL CHANGE (1.3)
NEW GNP 3,890.7
% CHANGE IN GNP (0.03)
1988
4.026.0
(14.7)
11.3
0.5
(1.5)
(0.5)
(4.9)
4.021.1
(0.12)
_1989_
4,161.0
(21.0)
14.7
0.8
(1.9)
(0.6)
(8.0)
4,153.0
(0.19)
1990
4,298.0
(27.0)
17.3
1.0
(2.3)
(0.8)
(11.8)
4,286.2
(0.27)
1991
4,440.0
(32.4)
19.9
1.2
(2.6)
(0.8)
(14.7)
4,425.3
(0.33)
-------
PHASE IN SCENARIO - 70
-------
PHASE IN SCENARIO - 70
-------
PHASE IN SCENARIO - 70* TAX - 50 PERCENT OF 1986 FE FUEL ECONOMY ADJUSTMENT
1987
1988
1989
1990
1991
Baseline GNP - 1983 $
(billions)
3,892.0
4,026.0
4,161.0
4,298.0
4,440.0
1. Effect of Increase In Indirect
Business Taxes
(8.5)
(16.6)
(23.9)
(30.6)
(36.6)
2. Reduced Oil Imports
4.5
7.2
10.1
12.6
15.1
3. Reduced Imports
0.3
0.6
0.9
l.l
1.3
4. Reduced Crude Refining
(0.6)
(1.0)
(1.3)
(1-7)
(2.0)
5. Reduced Energy Usage
(0.3)
(0.5)
(0.7)
(1.0)
(1.3)
TOTAL CHANGE
(4.6)
(10.3)
(14.9)
(19.6)
(23.5)
NEW GNP
3,887.4
4,015.7
3,146.1
4,278.4
4,416.5
% CHANGE IN GNP
(0.12)
(0.26)
(0.36)
(0.46)
(0.53)
-------
PHASE IN SCENARIO - 70* TAX - 50 PERCENT OF 1986 FE FUEL ECONOMY ADJUSTMENT
1987
1988
1989
1990
1991
Level of Tax
Highway Fuel Demand
(taxable, billions of gallons)
Fuel Tax Revenues - New Tax
(billions of 1983 $)
Fuel Tax Revenues - Old Tax
1. Federal
2. State
Net Tax Revenues
Reduced Oil Imports
(millions of barrels)
Value of Reduced Oil Imports
(billions of 1983 $)
0.14
86.27
12.08
(0.52)
(0.63)
10.93
136.43
4.50
0.28
82.79
23.18
(0.83)
(1.01)
21.34
219.29
7.24
0.42
79.19
33.26
(1.15)
(1.41)
30.70
305.00
10.07
0.56
75.96
42.54
(1.44)
(1.76)
39.34
381.90
12.60
0.70
72.72
50.90
(1-74)
(2.12)
47.04
459.05
15.14
-------
PHASE IN SCENARIO - 70
-------
REAL GNP UNDER EACH SCENARIO (Billions of 1983 Dollars)
40
-------
REAL GNP GROWTH RATE UNDER EACH SCENARIO (PERCENT CHANGE FROM PREVIOUS YEAR)
L987
1988
1989
1990
1991
Baseline
3.5
3.4
3.3
3-3
3-3
40t Tax
1. Shock Tax
No FE Adjustment
1 FE Adjustment
Full FE Adjustment
2. Phase Iri Tax
No FE Adjustment
i 1986 FE Adjustment
Full 1986 FE Adjustment
70$ Tax
3.5
3.5
3.5
3.4
3.5
3.5
3.4
3.4
3.4
3.3
3.4
3.4
2.9
2.9
2.9
3.3
3.3
3.3
3.3
3.3
3.3
3.2
3.2
3.2
3.3
3.3
3.4
3.2
3.2
3.3
1. Shock Tax
No FE Adjustment
i FE Adjustment
Full FE Adjustment
2. Phase In Tax
No FE Adjustment
i 1986 FE Adjustment
Full 1986 FE Adjustment
3.5
3.5
3.5
3.3
3.4
3.5
3.4
3.4
3.4
3.3
3.3
3.4
2.6
2.6
2.7
3.2
3.2
3.3
3.3
3.3
3.4
3.2
3.2
3.2
3.3
3.4
3.4
3.2
3.2
3.2
-------
PERCENTAGE CHANGE IN REAL GNP FROM BASELINE GNP UNDER EACH SCENARIO
40* Tax
1. Shock Tax
No FE Adjustment
i FE Adjustment
Full FE Adjustment
2. Phase In Tax
No FE Adjustment
4 1986 FE Adjustment
Full 1986 FE Adjustment
70* Tax
1. Shock Tax
No FE Adjustment
i FE Adjustment
Full FE Adjustment
2. Phase In Tax
No FE Adjustment
i 1986 FE Adjustment
Full 1986 FE Adjustment
1987
1988
1989
1990
1991
0
0
0
0
0
0
(0.46)
(0.44)
(0.41)
(0.44)
(0.41)
(0.37)
(0.43)
(0.37)
(0.32)
(0.11)
(0.06)
(0.01)
(0.20)
(0.14)
(0.06)
(0.29)
(0.21)
(0.11)
(0.37)
(0.27)
(0.17)
(0.43)
(0.33)
(0.21)
0
0
0
0
0
0
(0.72)
(0.69)
(0.65)
(0.70)
(0.64)
(0.57)
(0.68)
(0.60)
(0.49)
(0.18)
(0.12)
(0.03)
(0.34)
(0.26)
(0.12)
(0.48)
(0.36)
(0.19)
(0.59)
(0 46)
(0.27)
(0.68)
(0.53)
(0.33)
-------
APPENDIX C
ADDITIONAL TABLES FOR FEDERAL REVENUES ANALYSES
-------
FEDERAL REAL REVENUE UNDER EACIf SCENARIO (Billions of 1983 Dollars)
404: Tax
70* Tax
1987
1988
1989
1990
1991
Baseline
714.0
748.0
771.0
79fi. 0
823.0
1. Shock Tax
No FE Adjustment
i FE Adjustment
Full FE Adjustment
714.0
714.0
714.0
748.0
748.0
748.0
799.8
799.6
799.6
824.9
824.5
824.2
851.8
851.4
850.8
Phase In Tax
No FE Adjustment
J 1986 FE Adjustment
Full 1986 FE Adjustment
720.2
720.3
720.3
760.1
760.1
759.9
789.0
788.8
788.2
819.6
819.0
818.2
851.8
851.0
849.9
1. Shock Tax
No FE Adjustment
^ FE Adjustment
Full FE Adjustment
714.0
714.0
714.0
748.0
748.0
748.0
817.7
817.3
816.8
842.8
842.0
841.0
869.7
868.5
866.9
Phase In Tax
No FE Adjustment
i 1986 FE Adjustment
Full 1986 FE Adjustment
724.7
724.6
724.6
768.6
768.1
767.4
801.1
800.1
798.5
834.8
833.2
830.9
869.7
867.5
864.6
-------
FEDERAL REAL OUTLAYS UNDER EACH SCENARIO (Billions of 1983 Dollars)
40
-------
FEDERAL BUDGET SURPLUS (DEFICIT) UNDER EACH SCENARIO (Billions of 1983 Dollars)
1987
1988
1989
1990
1991
Baseline
(206.0)
(224.0)
(248.0)
(257.0)
(264.0)
40* Tax
<£>
CTi
1. Shock Tax
No FE Adjustment
4 FE Adjustment
Full FE Adjustment
2. Phase In Tax
No FE Adjustment
i 1986 FE Adjustment
Full 1986 FE Adjustment
70* Tax
(206.0)
(206.0)
(206.0)
(200.1)
(199.9)
(199.7)
(224.0)
(224.0)
(224.0)
(212.3)
(212.2)
(212.2)
(220.2)
(220.4)
(220.3)
(230.7)
(230.7)
(231.0)
(228.9)
(229.2)
(229.5)
(234.1)
(234.5)
(235.1)
(235.9)
(236.2)
(236.8)
(235.9)
(236.6)
(237.5)
1. Shock Tax
No FE Adjustment
1 FE Adjustment
Full FE Adjustment
2. Phase In Tax
No FE Adjustment
i 1986 FE Adjustment
Full 1986 FE Adjustment
(206.0)
(206.0)
(206.0)
(195.8)
(195.7)
(195.5)
(224.0)
(224.0)
(224.0)
(204.1)
(204.5)
(204.9)
(202.9)
(203.2)
(203.7)
(219.0)
(219.7)
(220.9)
(211.5)
(212.1)
(213.0)
(219.3)
(220.6)
(222.6)
(218.5)
(219.5)
(221.0)
(218.5)
(220.4)
(223.0)
-------
APPENDIX D
ADDITIONAL TABLES FOR UNEMPLOYMENT ANALYSES
-------
CIVILIAN UNEMPLOYMENT RATE UNDER EACH SCENARIO <%)
40
-------
APPENDIX E
ADDITIONAL TABLES FOR CONSUMER PRICES ANALYSES
99
-------
ANNUAL CHANGE FN CPI-U FUEL FOR EACH SCENARIO (%)
1987
1988
1989
1990
Baseline
40fr Tax
1.
Shock Tax
No FE Adjustment
1/2 FE Adjustment
Full FE Adjustment
4.7
4.7
4.7
4.7
4.5
4.5
4.5
4.5
4.3
36.2
36.2
36.5
4.3
4.1
4.1
4.2
2. Phase In Tax
No FE Adjustment 11.2
1/2 1986 FE Adjustment U.2
Full 1986 FE Adjustment 11.2
10.5 9.9 9.6
10.6 9.9 9.fi
10.6 10.0 9.6
7Q
-------
ANNUAL CHANGE IN CPI-U OTHER ITEMS FOR EACH SCENARIO (%)
1987
1988
1989
1990
1991
Baseline
40
-------
APPENDIX F
ADDITIONAL TABLES FOR SOURCES OF DIRECT TAX REVENUES ANALYSES
102
-------
INCIDENCE OF TAX (%) 1991
Federal State/Local Oil
Consumer Government Government OPEC Industry
40$ Tax
1. Shock Tax
No FE Adjustment 67 2 3 20 8
I FE Adjustment 58 3 4 25 10
Full FE Adjustment 48 3 4 32 13
2. Phase In Tax
No FE Adjustment 67 2 3 20 8
i 1986 FE Adjustment 50 3 4 30 12
Full 1986 FE Adjustment 30 5 6 43 17
70
-------
INCIDENCE OF TAX (billions of 1983 $) 1991
Total Federal
Revenue
Consumer
Federal
Government
State/Local
Government
OPEC
40t Tax
2.
Shock Tax
No FE Adjustment
i FE Adjustment
Full FE Adjustment
Phase In Tax
No FE Adjustment
1 1986 FE Adjustment
Full 1986 FE Adjustment
,70* Tax
2.
Shock Tax
No FE Adjustment
i FE Adjustment
Full FE Adjustment
Phase In Tax
No FE Adjustment
i 1986 FE Adjustment
Full 1986 FE Adjustment
33.4
32.6
31.7
33.4
31.9
30.3
54.0
52.4
50.1
54.0
50.9
46.7
22.4
t9.0
15.2
22.4
16.1
9.0
34.7
30.0
23.6
34.7
25.8
13.9
0.8
0.9
l.l
0.8
1.1
1.5
1.3
1.6
1.8
1.3
1.7
2.3
0.9
1.2
1.4
0.9
1.4
1.8
1.6
1.9
2.3
1.6
2.1
2.8
6.7
8.2
10.0
6.7
9.5
12.9
11.7
13.5
16.0
11.7
15.1
19.9
Oil
Industry
2.6
3.3
4.0
Change In
GNP
2.6
3.9
5.1
4.6
5.5
6.4
4.6
6.1
7.8
(19.1)
(16.6)
(14.0)
(19.1)
(14.6)
(9-5)
(30.0)
(26.5)
(21.9)
(30.0)
(23.5)
(14.7)
-------
INCIDENCE OF TAX (billions of 1983 $) 1987-1991
Total Federal Federal State/Local
Revenue Consumer Government Government
OPEC
40* Tnx
2.
Shock Tax
No FE Adjustment
i FE Adjustment
Full FE Adjustment
Phase In Tax
No FE Adjustment
} 1986 FE Adjustment
Full 1986 FE Adjustment
fO* Tax
1. Shock Tax
No FE Adjustment
1 FE Adjustment
Full FE Adjustment
2. Phase In Tax
No FE Adjustment
1 1986 FE Adjustment
Full 1986 FE Adjustment
100.2
98.7
96.9
102.9
99.2
94.5
162.0
158.7
154.3
170.3
162.0
150.0
67.1
60.5
52.9
69.8
47.9
19.4
104.0
94.6
82.0
112.4
80.0
33.7
2.3
2.7
3.1
2.3
3.6
5.2
4.0
4.5
5.0
4.0
5.7
8.1
2.8
3.2
3.6
2.8
4.3
6.4
4.9
5.4
6.2
4.9
6.9
9.8
20.1
23.1
26.7
20.0
31.0
45.5
35.1
38.7
43.6
35.0
49.5
70.4
Oil
Industry
7.9
9.2
10.5
8.0
12.4
18.0
14.0
15.5
17.5
14.0
19.9
28.0
Change In
GNP
(57.3)
(52.3)
(46.9)
(59.1)
(43.5)
(24.4)
(90.0)
(82.9)
(73.7)
(96.0)
(72.9)
(40.7)
------- |