Anticipation, Tax Avoidance, and the Price Elasticity of Gasoline Demand

Abstract

Least-squares estimates of the response of gasoline consumption to a change in the gasoline price are biased toward zero, given the endogeneity of gasoline prices. A seemingly natural solution to this problem is to instrument for gasoline prices using gasoline taxes, but this approach tends to yield implausibly large price elasticities. We demonstrate that anticipatory behavior provides an important explanation for this result. Gasoline buyers increase purchases before tax increases and delay purchases before tax decreases, rendering the tax instrument endogenous. Including suitable leads and lags in the regression restores the validity of the IV estimator, resulting in much lower elasticity estimates.Note: This table reports coefficient estimates and standard errors from four separate least squares regressions. The dependent variable in all specifications is the month-to-month change in log gasoline purchases, and the coefficients of interest correspond to indicator variables for the month before, the month during, and the month after state gasoline tax changes. All regressions are estimated using the complete panel of 50 states plus the District of Columbia, each observed for 230 months, for a total of 11,730 observations. Standard errors are clustered by state. Asterisks denote statistical significance at the ***1%, **5%, and *10% level.J. COGLIANESE ET AL.

Charging Drivers by the Pound: The Effects of the UK Vehicle Tax System

“…For example, anticipating a future tax for high-CO 2 -emitting vehicles, consumers could decide to purchase such vehicles before the tax increase. This behavior would bias estimates of the effects of taxes on registrations, similarly to the bias introduced by anticipated fuel tax changes (Coglianese et al 2017). Based on our reading of Her Majesty's Treasury documentation of each year's budget and on examining news coverage about the budget and VED debate prior to the final budget approval, we believe that anticipation effects are unlikely to be important in this setting (see Appendix C).…”

Elasticity Analysis of Fossil Energy Sources for Sustainable Economies: A Case of Gasoline Consumption in Turkey

“…Kayser [46] investigated the USA case and concluded that taxes on gasoline had an important effect on the decrease of gasoline demand. Tiezzi and Verde [47], Coglianese et al [5], Rivers and Schaufele [48] and Filippini and Heimsch [49] also examined the issues affecting gasoline demand in different countries. It was concluded that tax rate had a statistically significant effect on gasoline demand.…”

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