All states impose excise taxes on gasoline. According to...

All states impose excise taxes on gasoline. According to data from the Federal Highway Administration, the state of California imposes an excise tax of $\$ 0.40$ per gallon of gasoline. In 2013, gasoline sales in California totaled 18.4 billion gallons. What was California's tax revenue from the gasoline excise tax? If California doubled the excise tax, would tax revenue double? Why or why not?

Key Concepts

Excise Tax

An excise tax is a fixed per-unit tax imposed on the sale of a particular good. In the context of gasoline, it means that for every gallon sold, a set amount of tax is collected, regardless of the price or total cost of the product. This type of tax is commonly used by states and governments to fund specific projects, such as transportation infrastructure, or to influence consumption behavior.

Calculation of Tax Revenue

Tax revenue from an excise tax is calculated by multiplying the tax rate (the amount charged per unit) by the total number of units sold. In a scenario where you know the tax per gallon and the total gallons sold, this simple operation gives the total revenue generated from the tax. It is a straightforward arithmetic process, but it assumes that the quantity sold remains constant regardless of the tax rate.

Price Elasticity of Demand

Price elasticity of demand measures how sensitive consumers are to changes in price. When a good like gasoline experiences higher taxes that increase its price, consumers may reduce their consumption, switch to alternative fuels, carpool, or make other adjustments. This behavioral response means that if the excise tax is doubled, the quantity of gasoline sold might decline, and as a result, the increase in tax revenue may be less than double. Elasticity of demand is crucial in understanding the overall effect of tax policy changes on revenue.

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