Analysis Cruising along: Gasoline prices and state gas tax revenue

from NewsLink, Vol. 6, No. 1, Fall 2001

Gasoline prices in Massachusetts have varied from a low of $1.02 for regular-grade in February 1999 to $1.73 in May of 2001. But after May's huge price hike, gas prices are trending downward again. The average price for September 2001 was $1.44 and in late October a colleague bought gasoline for just $1.18 a gallon – a price far below the gloomy forecasts of higher gas prices we heard about earlier this year. Despite the price fluctuations, state revenues for motor fuel taxes remain remarkably stable even though they follow a seasonal cycle. The tax, which is levied at 21 cents per gallon, yielded an average monthly revenue between January 1998 and September 2001 of $54 million. This is because the demand for gasoline is slow to respond to changes in price. According to research by BHI Senior Economist Jonathan Haughton, the own-price elasticity of demand for gasoline is -0.15. (Jonathan Haughton and Soumodip Sarkar, “Gasoline Tax as a Corrective Tax: Estimates for the United States, 1970-1991,” The Energy Journal, 1996, Vol. 17, No. 2.) That means if prices increase by 10 percent the quantity demanded is only 1.5% less. Even a 50% increase in gasoline prices would reduce purchases by just 7.5%. Sources for chart: Mass. Department of Revenue, American Automobile Association and US Energy Information Administration. NewsLink is the quarterly newsletter of the Beacon Hill Institute for Public Policy Research at Suffolk University. © 1996-2002. All rights reserved.

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