Future of gasoline taxes a vertical tax competition approach

Abstract

This paper sets up a simple model to study a tax reform where federal gasoline taxes are gradually replaced by a combination of tolls that are decided by local authorities. When the federal and local governments maximize the welfare of their own citizens, there are no spillovers, capacity is given and all tax revenues are returned to the different regions, the reform can increase welfare if the implementation costs of the local tolls remain limited. This result holds for governments that behave non-cooperatively or when the federal government is a Stackelberg leader. One of the major barriers in the reform is the allocation of the revenues: when the federal government wants to keep the initial gasoline tax revenue constant, there is a vertical tax conflict that reduces the efficiency gains of the new instruments. The reallocation of tax revenues via changes in the intergovernmental transfer system is therefore an important component of this tax reform.