Bobur Alimov

Hemanta Shrestha

Stanley McMillen

English

Research Papers in Economics

1 
 
 
 
 
 
The Economic Impact of the Proposed Gasoline Tax Cut 
In Connecticut  
 
 
 
By 
 
 
 
Hemanta Shrestha, Research Assistant 
Bobur Alimov, Research Assistant 
Stanley McMillen, Manager, Research Projects 
 
 
 
 
June 21, 2000 
 
 
 
 
 
 
 
 
CONNECTICUT CENTER FOR ECONOMIC ANALYSIS
 
Department of Economics, U-63 
University of Connecticut 
Storrs, CT 06269-1063 
Phone: (860) 486-0485 
Fax: (860) 486-4463
2 
 
Introduction 
  This analysis estimates the effect of a decrease in the Connecticut gasoline excise 
tax financed by an increase in the State income tax on the Connecticut economy using the 
single-region (statewide) REMI input-output model.  The REMI model is a sophisticated 
53-sector replication of the state’s economic structure, capable of projecting the 
economic impacts of various shocks up to the year 2035.  Our objective is to measure the 
long run economic impact of the gasoline tax cut and personal income tax increase on the 
economy in terms of several key economic variables, including total employment, 
personal income and Gross State Product (GSP).  The analysis looks at the impact over a 
period of eleven years (2000-2010).   
 
________________________________________________________________________ 
Assumptions and Methodology 
 
This analysis examines several questions: 
1.  What is the impact of a gasoline tax cut on the state budget?  What will be the loss in 
state tax revenue as a result of a gasoline tax cut in the unbalance budget case?   
2.  If we assume a balanced budget, what will be the size of the state income tax increase 
necessary to offset the loss in state revenue?  What will be the long-run economic 
consequences of the gasoline tax cut and offsetting income tax increase on the whole 
state?  
3.  What will be the long-run economic impact in the case of the unbalanced budget? 
4.  Finally, is it worth it for the state to reduce the gasoline tax? 
 
  We estimated the impact of the gasoline tax cut on the state budget based on a 
proposed 7 cents per gallon tax cut.  Appendix 1 presents the data used in the model.  3 
Appendix 2 presents a detailed description of our econometric estimations.  The model 
suggested the own price elasticity of gasoline consumption was –0.512975, and the 
income elasticity of gasoline consumption was 0.367797.  Using these estimates we 
calculated a projected increase in gasoline consumption after the tax cut, which then 
allowed us to find that the projected net loss in gas tax revenue to the state is $86.9 
million. 
  Under the model of a balanced budget, we propose that the loss in the revenue 
from gasoline tax cut is offset by an equivalent increase in personal income taxes.  We 
model the reduction in the gasoline tax by adjusting the Consumer Expenditure Price 
Index in REMI by an equivalent dollar amount.  We offset this loss of tax revenue by an 
increase in income tax by the same amount.  Because the average marginal federal 
income tax rate is 29%
1, the state income tax increase implies an increase in personal 
income tax of $61.7 million (71% of $86.9 million).  In effect, the Federal government 
subsidizes state tax increases. 
  To see the long-run effects of the gasoline tax cut under the balanced budget 
scenario, we employed the REMI model using the $86.9 million reduction in gasoline 
prices and $61.7 million increase in personal income taxes derived earlier in the report.  
Table 1 in Appendix 3 shows the results.  
  Under the first model of an unbalanced budget, we capture the gasoline tax cut by 
reducing government expenditures on highways by $86.9 million and adjusting the 
Consumer Expenditure Price Index in REMI by an equivalent dollar amount.
2  Table 2 in 
Appendix 3 shows the results of this model. 
                                                           
1 See “All Tax Cuts are Not Equal” by Fred V. Carstensen, The Connecticut Economy, Spring 1999, p. 8.  
2 We use revenues from the gasoline taxes for highway maintenance. 4 
  The second model of an unbalanced budget assumes that the gasoline tax cut will 
be offset by internal reallocation of funds and stretching out some payments.  In this 
scenario we adjust the Consumer Expenditure Price Index in REMI by $86.9 million 
without any other changes in the budget.  Table 3 in the Appendix 3 shows the results.  In 
each case above the gas tax cut induces income and substitution effects because relative 
prices change.  We expect substitution of Connecticut gas for nearby states’ gas, because 
there are no material substitutes for gasoline.  In the balanced budget case, the positive 
income effect of the gas price decrease matches somewhat the decrease in disposable 
income.  In the unbalanced budget case, the income effect probably results in somewhat 
increased gas consumption perhaps manifested in SUV proliferation. 
 
Results 
  The increase in the state income tax required to offset the proposed 7 cents per 
gallon gasoline tax cut can be achieved by an increase of the highest marginal tax rate 
from 4.5% to 4.5864%, which accounts for approximately $53 in additional tax per year 
for an average taxpayer in Connecticut earning $62,000 adjusted gross income.  
Assuming a conservative 20,000 miles per year for an average driver and 22 mpg for an 
average car, we get savings of approximately $64 from the gasoline tax cut, which leaves 
an average taxpayer almost indifferent to the proposed change.
3 
 
  The tables in Appendix 3 summarize the REMI simulation results.  The tables 
present five variables that measure the economic effects of impacts examined: gross state 
product (GSP), total employment, population, personal income, and real disposable 
                                                           
3 For our purposes an average driver is an average taxpayer. 5 
personal income.  The tables show an average of the annual increases (or decreases) of 
these aggregate levels that flow directly and indirectly from the proposed gasoline tax cut 
and income tax increase over eleven years, compared to the baseline (status quo) forecast 
of the Connecticut economy’s performance.  For example, the value for GSP in the 
second column of Table 1 indicates that, on average, there will be an increase in GSP of 
$32.742 million per year over the REMI model’s baseline forecast in the case of a 7 cents 
per gallon gasoline tax cut offset by an increase in state personal income taxes over 11 
years.  
  The results of our analysis show that although the proposed 7 cents per gallon 
gasoline tax cut may leave an average taxpayer indifferent, the state economy will 
definitely benefit from it.  Our results are relatively conservative and slightly 
underestimate true economic impact on the economy, as they do not take into 
consideration the capture of additional gasoline consumers resulting from the decrease in 
Connecticut’s relative gasoline prices compared to our three neighboring states (New 
York, Massachusetts, Rhode Island).  We assume that the fundamental gasoline price is 
the same in the four states and differences are due only to state taxes.  The total state tax 
in each state is: 29.8 cpg for New York, 21.5 cpg for Massachusetts, 28 cpg for Rhode 
Island, compared to 35.3 cpg (32 cpg excise tax and 3.3 cpg – 5% gross earnings tax 
collected at wholesale) for Connecticut before the cut.  After the reduction in 
Connecticut, the relative price is only substantially different for Massachusetts.  We 
assume that Connecticut residents formerly going to New York or Rhode Island to buy 
gasoline will now be indifferent and probably buy their gasoline in Connecticut.  People 
who formerly bought their gas in Massachusetts will likely continue to do so because 6 
there is still some benefit to do so and habitual behavior is slow to change without 
substantial incentive.  We assume that people in southwestern Connecticut did not travel 
to New York to buy gas, because of their high opportunity cost, and therefore the cut will 
not change their behavior much.  We estimate that wealthy people will benefit less than 
poorer people will gain from this proposed policy change. 
 7 
Appendix 1  
Data on gasoline consumption, gasoline prices and income per capita in the State of 
Connecticut
 
 
 
Year Consumption 
of gasoline 
Price of 
gasoline 
Income 
per capita
Jul-93 111,388,111  1.2344  31,206.32
Aug-93 109,152,965  1.2277  31,321.73
Sep-93 105,786,180  1.2301  31,453.01
Oct-93 108,883,889  1.2295  31,774.49
Nov-93 104,397,677  1.2449  31,806.73
Dec-93 110,924,341  1.2355  31,724.06
Jan-94 98,650,325  1.2473  31,244.99
Feb-94 91,796,576  1.2622  31,143.64
Mar-94 104,829,696  1.2541  31,138.51
Apr-94 104,432,182  1.2678  31,368.66
May-94 110,780,108  1.2594  31,451.68
Jun-94 111,774,989  1.2592  31,526.63
Jul-94 112,092,781  1.2718  31,546.51
Aug-94 113,791,424  1.2612  31,640.56
Sep-94 106,315,991  1.2340  31,761.78
Oct-94 115,838,038  1.2327  31,966.92
Nov-94 106,479,636  1.2402  32,099.93
Dec-94 114,338,786  1.2823  32,217.55
Jan-95 106,639,453  1.3083  32,335.59
Feb-95 99,300,912  1.3101  32,410.59
Mar-95 110,447,201  1.3106  32,458.34
Apr-95 108,195,550  1.3402  32,413.11
May-95 116,321,562  1.3425  32,455.69
Jun-95 116,342,333  1.3181  32,520.34
Jul-95 113,261,543  1.3160  32,629.35
Aug-95 118,559,940  1.3235  32,721.42
Sep-95 109,190,351  1.3373  32,818.84
Oct-95 113,873,780  1.3387  32,912.60
Nov-95 109,518,115  1.3410  33,027.49
Dec-95 109,537,301  1.3466  33,154.49
Jan-96 99,616,316  1.3497  33,315.61
Feb-96 97,617,365  1.3505  33,450.32
Mar-96 102,542,153  1.3701  33,580.63
Apr-96 101,657,207  1.3883  33,707.59
May-96 114,627,345  1.3444  33,828.34
Jun-96 112,436,106  1.3358  33,943.90
Note: The data has been deflated by the Connecticut CPI. 
 
 
 
Year Consumption 
of gasoline 
Price of 
gasoline 
Income 
per capita
Jul-96 114,065,956 1.3378  34,065.24
Aug-96 118,339,648 1.3553  34,162.24
Sep-96 106,446,676 1.3619  34,245.83
Oct-96 112,605,893 1.3924  34,272.23
Nov-96 104,987,894 1.3920  34,361.90
Dec-96 105,761,266 1.3812  34,471.02
Jan-97 100,045,880 1.3774  34,640.04
Feb-97 90,527,725 1.3704  34,757.77
Mar-97 101,563,898 1.3744  34,864.65
Apr-97 103,637,399 1.3650  34,954.58
May-97 115,823,620 1.3699  35,044.31
Jun-97 111,670,034 1.3605  35,127.74
Jul-97 118,812,557 1.3287  35,143.08
Aug-97 115,357,070 1.3905  35,260.28
Sep-97 104,999,775 1.3247  35,417.55
Oct-97 110,111,841 1.3195  35,700.65
Nov-97 105,177,798 1.3430  35,873.71
Dec-97 110,564,687 1.3366  36,022.51
Jan-98 100,068,567 1.3374  36,139.61
Feb-98 92,837,524 1.3534  36,245.45
Mar-98 104,242,838 1.3580  36,332.60
Apr-98 106,006,817 1.3550  36,336.65
May-98 116,608,802 1.3481  36,434.73
Jun-98 113,571,657 1.3611  36,562.42
Jul-98 124,759,831 1.3333  36,724.97
Aug-98 120,555,513 1.3063  36,907.97
Sep-98 114,202,166 1.3088  37,116.65
Oct-98 116,569,613 1.3113  37,483.85
Nov-98 109,242,880 1.3257  37,644.30
Dec-98 118,044,513 1.3561  37,730.81
Jan-99 103,353,663 1.3631  37,585.69
Feb-99 98,512,878 1.3687  37,642.62
Mar-99 114,970,435 1.3391  37,743.90
Apr-99 114,693,726 1.3195  37,945.80
May-99 122,401,959 1.3025  38,093.57
Jun-99 123,428,715 1.3185  38,243.49
Source: The data on gasoline consumption was provided by the State of Connecticut Department of Revenues Services. 
The data on gasoline prices was provided by the Hartford office of AAA. 
The data on income per capita was generated using the data from the Survey of Current Business by Bureau of Economic Analysis. 8 
Appendix 2:  
Estimation of the change in the state gasoline tax revenues: 
 
Part 1.  Estimation of price elasticity and income elasticity of gasoline consumption. 
We constructed the following model for gasoline consumption:  
capita per    income   real   ized deseasonal
gasoline   of   price   real   ized deseasonal
gasoline   of   n consumptio   ized deseasonal
) , 0 (    is       and        where
ln ln ln
2
1
2 1 0
=
=
=
+ =
+ + + =
−
t
t
t
t t t t
t t t t
I
P
C
iid
I P C
ε σ ε ε ρυ υ
υ α α α
 
 
The model gives the following results: 
Ep = price elasticity of gasoline consumption = -0.512975 (t: -1.736) 
Ei = income elasticity of gasoline consumption = 0.367797 (t: 2.21) 
R
2 = 0.663, DW = 1.64, r = 0.644 
Part 2.  Estimation of the change in consumption of gasoline as a result of a gasoline tax 
cut.  
P1999 = average price for 1998-1999 fiscal year = 1.3294.  
∆P = -0.07 
Then the percentage change in gasoline price is 
%∆P = ∆P/P1999 = -0.052655 
Then we find the percentage change in gasoline consumption as a result of a change in 
gasoline price: 
%∆Cp = Ep * %∆P = 0.02701 
Now we find the predicted change in gasoline consumption as a result of a direct change 
in gasoline price: 
∆Cp = %∆Cp * C1999 = 37,293,676 9 
where C1999 = cumulative gasoline consumption for 1998-1999 fiscal year = 
1,380,735,892 
The examination of income per capita series suggests that they have a linear trend with 
the slope of 1.003283. 
Therefore, the predicted percentage change in income per capita is 
%∆I = 0.003283 
Then we find the percentage change in gasoline consumption as a result of a predicted 
change in income per capita:  
%∆Ci = Ei * %∆I = 0.0012075 
Now we find the predicted change in gasoline consumption as a result of a predicted 
change in income per capita: 
∆Ci = %∆Ci * C1999 = 1,667,208 
Then the total predicted change in gasoline consumption is: 
∆C = ∆Cp + ∆Ci = 38,960,884  
Part 3.  Estimation of the change in state gasoline tax revenues. 
t t t t t t t t t C C C C TR τ τ τ τ ∆ + ∆ = − = ∆ − − − 1 1 1  
Therefore, 
 
∆TR = 38,960,884 * 0.25 – 1,380,735,892 * (-0.07) = -$86,911,291 10 
Appendix 3: REMI Simulation Results 
 
 
Table 1.  Annual average changes in selected economic variables from 7cpg decrease 
in gasoline tax financed by an increase in personal state income tax (2000-2010).  
 
 
 
  Annual 
Average 
Employment (Units)  739 
GRP (Mil. 92$)  35.467 
Personal Income (Mil. Nominal $)  23.764 
Real Disposable Personal Income (Mil. 92$) 53.087 
Population (Units)  1104 
 
 
 
 
Table 2.  Annual average changes in selected economic variables from 7cpg decrease 
in gasoline tax under the non-balanced state budget assumption with a decrease in 
government expenditures (2000-2010).  
 
 
 
  Annual 
Average 
Employment (Units)  581 
GRP (Mil. 92$)  32.742 
Personal Income (Mil. Nominal $)  6.826 
Real Disposable Personal Income (Mil. 92$) 103.438 
Population (Units)  1978 
 
 
 
 11 
Table 3.  Annual average changes in selected economic variables from 7cpg decrease 
in gasoline tax under the non-balanced state budget assumption without a decrease 
in government expenditures (2000-2010).  
 
 
 
  Annual 
Average 
Employment (Units)  1,531 
GRP (Mil. 92$)  72.047 
Personal Income (Mil. Nominal $)  65.394 
Real Disposable Personal Income (Mil. 92$) 124.455 
Population (Units)  2801 
 
 
 
 

The Economic Impact of the Proposed Gasoline Tax Cut in Connecticut

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The Economic Impact of the Proposed Gasoline Tax Cut in Connecticut

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