Evaluating fuel tax equity: direct and indirect distributional effects.

A recent proposal by the Clinton administration calls for a general tax on all energy products. Along with raising revenue, such a tax has the desirable effects of conserving finite resources, reducing pollution emissions, and reducing dependency on foreign supplies of energy. In addition, the

Most studies of the distributional effects of energy price increases are partial equilibrium in nature. Attention focuses on a particular fuel or fuel aggregate, and effects on other commodities are ignored. Examples are seen in the work of Zupnick (1975), Palmer et al. (1976), Stucker (1977), Henderson (1988), and Poterba (1991), who find that gasoline and other energy taxes place disproportionate burdens on low income and nonwhite consumers.(2)

Partial equilibrium studies are incapable of capturing the entire range of relationships among sectors of the economy. This fact is recognized in Solow's (1985) energy-based general equilibrium study.(3) Solow states that energy taxes are likely to distort input choices and cause changes in the composition of output.(4) However, the ability of Solow's model to measure such effects is restricted. The economy is composed of three sectors, including a single fuel aggregate, and it is assumed that the capital stock and labor force are fixed. Solow's study illustrates how data constraints impose a trade-off between the number of sectors that can be included and the degree of flexibility attainable in estimating parameter values. Among general equilibrium approaches, this fact explains why the input-output (I-0) model is used to measure highly disaggregated effects. Under the fixed-proportions assumption, direct and indirect sectoral relationships are captured by the Leontief inverse. Bahl and Shellhammer (1969) discuss the range of uses for the I-0 model to evaluate tax incidence and other tax effects.(5)

Applications that examine the relationship between energy consumption and income are seen in work by Herendeen (1974) and Hannon (1975). They each find that accounting for both direct and indirect energy consumption results in a more uniform proportion of expenditure on energy across income levels.(6) When all effects are included, a tax on energy is more likely to be proportional than regressive.