In an effort to raise more revenue, Mayor Marion Barry of Washington, D.C. decided in early 1980 to increase the city’s tax on gasoline. On August 6, 1980, the city government raised the gas tax to 18 cents per gallon, from the previous level of 10 cents per gallon. The higher tax raised the retail price of gasoline by 8 cents to $1.60 per gallon. The mayor and city council thought the higher gas tax would be an easy way to increase city revenue. The difference of a few pennies a gallon would hardly be noticed, they reasoned, since gasoline prices were already so high. Furthermore, much of the increased tax would be paid by tourists and suburbanites rather than city residents (i.e., voters). Finally adding a few pennies per gallon would generate lots of revenue, since District gas stations were then selling 16 million gallons a month. The D.C. Department of Finance and Revenue knew about the law of demand. However, it thought the reduction in quantity demanded (gasoline sales) would be very small in relation to the gas tax increase. After all, U.S. motorists had reduced their gasoline consumption only slightly when OPEC had tripled the price of gasoline. Unfortunately, the District's projections were grossly in error. In August 1980, gasoline sales fell from 16 million gallons per month to only 11 million. Ten gas stations closed, and more than 300 service-station workers were laid off. Realizing his mistake, Mayor Barry asked the city council to repeal the higher gas tax in November, just four months after it was introduced. Using the principles we have learned in this class, explain why the District thought that this tax would be successful. Then, explain why it failed.
In an effort to raise more revenue, Mayor Marion Barry of Washington, D.C. decided in early 1980 to increase the city’s tax on gasoline. On August 6, 1980, the city government raised the gas tax to 18 cents per gallon, from the previous level of 10 cents per gallon. The higher tax raised the retail price of gasoline by 8 cents to $1.60 per gallon. The mayor and city council thought the higher gas tax would be an easy way to increase city revenue. The difference of a few pennies a gallon would hardly be noticed, they reasoned, since gasoline prices were already so high. Furthermore, much of the increased tax would be paid by tourists and suburbanites rather than city residents (i.e., voters). Finally adding a few pennies per gallon would generate lots of revenue, since District gas stations were then selling 16 million gallons a month.
The D.C. Department of Finance and Revenue knew about the
Unfortunately, the District's projections were grossly in error. In August 1980, gasoline sales fell from 16 million gallons per month to only 11 million. Ten gas stations closed, and more than 300 service-station workers were laid off. Realizing his mistake, Mayor Barry asked the city council to repeal the higher gas tax in November, just four months after it was introduced. Using the principles we have learned in this class, explain why the District thought that this tax would be successful. Then, explain why it failed.
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