How much do Canadians spend on gasoline? To answer the question, we can look at data from Statistics Canada's Survey of Household Spending. These data are from 2008, and contain information on household expenditures on gasoline and other fuels for owned and leased automobiles, trucks, and vans.
Overall, the average Canadian household spends $2,232 on gasoline and other fuels. This represents 2.6 per cent of total income before taxes.
If you break this down by income group, those with incomes over $90,000 spend more than five times as much ($3,621 on gasoline) as those with incomes under $30,000 ($662 on gasoline). As a proportion of income, however, gasoline is only 2.78 per cent of higher income household budgets but 4.5 per cent of lower income household budgets.
When gas prices change, it has two effects. First, households will decrease their gas purchases because the price of gas is now higher than for other things. Perhaps they will take transit, or cut out some lower-priority trips. This may be good for the environment, of course, but from the household's own point of view less gasoline used means they will have to make some changes.
The second effect is that they have less money left over to buy other things -- the household budget is tighter.
The uproar over higher gas prices appears to be much more about the effect on household budgets than the hardships of taking transit or fewer lower-priority car rides. If that is the case, then there is an income problem here to be solved.
Two solutions present themselves. The first would be to change gas prices -- say by lowering gas taxes. The problem with this solution is that most of the benefit would go to higher-income households, since they buy more gas. True, it would also benefit low income households, but not as much as it would higher income households.
The second solution would be to go to the heart of the matter. Higher gas prices create tighter household budgets. This is an income problem. The solution for an income problem is to change incomes, not change prices. An income solution would be to send out a flat rebate cheque to all households. That is, instead of lowering gas taxes by $1-billion, send out cheques instead. Not only does this avoid messing with the important economic signals about conservation provided by prices, it is also targetable to lower income families that might suffer the most from tight family budgets.
There are much larger problems in our economy than a temporary blip in gas prices. So, I don't know whether any policy action is necessary. But what is clear is that if policy action is taken it should be to compensate the family budgets of those most affected, rather than to subsidize the gas purchases of high income households.
Kevin Milligan is Associate Professor of Economics at the University of British Columbia
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