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Impacts of Rising Gasoline Prices: The Public Finance Issue Presented by Charles E. Olson Visiting Associate Professor Robert H. Smith School of Business University of Maryland
Rising gasoline prices have produced a number of effects including the following: • Reduced gasoline usage • Scrapping of inefficient vehicles • Greater transit usage • More airline travel • More carpooling • Less air pollution • Less shopping and eating out • Reallocation of household and business budgets • Reduced user fees for Federal and state governments, including D.C., Maryland and Virginia
Reduced user fees create significant distress for state and local government because numerous budgets depend on this source of revenue. • The problem is caused by the gasoline/diesel tax structure which is a flat tax per gallon of fuel purchased. In Maryland, for example, the tax is 23.5 cents per gallon. In combination with the Federal tax, the total is 41.5 cents per gallon. • Tax revenues don’t keep up with the price level • Reduced usage lowers revenues • Lower revenues may reduce highway maintenance and construction
Proposed Solutions • Reduce Speed Limits • Tax Holiday (Albert Wynn) • Other Taxes (Martin Wachs) • Toll Roads • Stricter Mileage Requirements • Price Regulation (Hawaii)
Olson Regional Plan D.C., Maryland and Virginia act to increase gasoline and diesel taxes by 15 cents per gallon in 2006, followed by 2 cent increases from 2007 to 2011. After 2011, tax rises by the CPI plus 1 percent per year.
Olson Regional Plan Disadvantages: • Higher fuel prices • Some sales leakage to border states • Greater impact on lower income families
Olson Regional Plan • Advantages • Higher pump price is efficient and easy to collect. • Area requires transportation infrastructure improvements and maintenance. In Maryland, for example, the Connector is an expensive project. • Higher pump prices will speed conservation both in terms of short-term effects (transit, pooling, fewer trips) and long-term (vehicle conversion). • Air pollution will be reduced with reduced usage, more efficient vehicles and better highway systems. • The region will make the transition to more efficient transportation more quickly than other areas. • A greater percentage of the gasoline/diesel revenue flow will remain in the U.S. and the region.
Conclusions • Transportation infrastructure is essential. • The gasoline/diesel tax is an efficient way to collect revenue to finance regional highway and transit construction and maintenance. • Government should act responsibly to keep up these collections in response to lower usage levels.