Thompson Rivers University

Is It Time to Raise the Gas Tax? Optimal Gasoline Taxes for Ontario and Toronto

November 13, 2015

Dr. Wood research attempts to calculate the optimal (second best) gasoline taxes for Ontario and the Greater Toronto-Hamilton Area (GTHA) under distortionary pre-existing income taxes. It is well known that an increase in the tax on gasoline has social benefits because it reduces traffic congestion, air pollution, and accidents. An increase in the gasoline tax also raises revenue. This could be used to reduce income taxes, fund transit infrastructure, or reduce the provincial debt. His results suggest a second-best optimal gasoline tax of approximately 40.57 cents per litre in 2006 Canadian dollars for the GTHA. This tax is approximately 15 cents higher than the current tax rate of 24.7 cents per litre. Dr. Wood also finds that the optimal tax is not dependent on where the additional revenue are used. Reducing taxes on income or funding increased public transit infrastructure (the Big Move plan) does not change the optimal tax rate. However, in the absence of a GTHA tax, the second-best optimal gasoline tax for the province of Ontario as a whole is 28.51 cents per litre. This is not far from the current tax rate and in line with proposed increases. His research was published in the peer review journal Canadian Public Policy and a commentary in the National Post.

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