The Economic Effects of an Increase in the Kansas Gasoline Tax

Abstract

This paper investigates the economic impact of a two cent a gallon increase in the Kansas gasoline tax, with the proceeds expended on highway construction. It considers both the direct effect on gasoline sales, and also the total effects on the Kansas economy resulting from multiplier effects on state taxes and high­way expenditures. This paper pays special attention to effects in the Kansas border counties near Kansas City.

Two methods of analysis are employed to measure the direct effect of the tax increase on gasoline demand. First, an estimate of the Kansas price elasticity of gasoline from a previous study is used to assess the effect of taxes on Kansas gasoline sales. This evaluation reflects the reduction in all gasoline purchases in Kansas due to the gasoline tax, including the substitution of gasoline purchased outside Kansas for gasoline purchased in Kansas. Second, regression analysis is utilized to try to estimate the effect on Kansas gasoline sales of a tax rate disparity between Kansas and Missouri; this should measure only the portion of sales lost as a result of substitute purchases of Missouri gasoline. The tax rate differential turns out to have the expected sign, but is statistically insignificant in explaining Kansas gasoline sales.

Third, the impact of the tax and expenditure increase on the whole Kansas economy is analyzed using income and industry multipliers from the Kansas Long Term Model. However, the actual benefits from using improved highways are not considered. Also, the "excess burden" or deadweight loss of taxation is not considered (but we assume this is small in the following discussion). Therefore what the paper measures is not a total impact, but rather a lower bound. If the unmeasured benefits of using the improved highways (net of excess burdens) happen to exceed this lower bound, then the net impact of the project on Kansas income would be positive.