The Taxation of Fuel Economy
Policy-makers have instituted a variety of fuel economy tax policies -- polices that tax or subsidize new vehicle purchases on the basis of fuel economy performance -- in the hopes of improving fleet fuel economy and reducing gasoline consumption. This article reviews existing policies and concludes that while they do work to improve vehicle fuel economy, the same goals could be achieved at a lower cost to society if policy-makers instead directly taxed fuel. Fuel economy taxation, as it is currently practiced, invites several forms of gaming that could be eliminated by policy changes. Thus, even if policy-makers prefer fuel economy taxation over fuel taxes for reasons other than efficiency, there are still potential efficiency gains from reform.
This paper was presented as part of the NBER's Tax Policy and the Economy conference in 2010 and will appear in the conference volume. The author would like to thank Jeffrey Brown for editorial guidance and Adam Cole for providing assistance in locating key data and legislative details. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.
James M. Sallee, 2011. "The Taxation of Fuel Economy," Tax Policy and the Economy, University of Chicago Press, vol. 25(1), pages 1 - 38.