I have a 1998 Toyota T100 4wd with 265/70R16 tire size. My current mileage is in the high teens mpg with I hear is average. Most of my mileage is 65-75 mph on the highway/state roads. Realizing there's a large number of variables that can affect mpg, I'm considering reducing the tire size to 235-255 width/65-70R16 tire in hopes to improve the mpg. The side effects I can think of are fast speedometer, lower truck height, greater suspension wear, better handing and braking(assuming traction), and higher engine rpm. I can accept all of these with better mileage. Anyone have advice or experience on whether this action would improve my mileage or have other consequences? FYI - I've found a great resource at http://www.csgnetwork.com/tireinfo4calc.html which gives detailed differences in tires sizes. Thanks.

I might be mistaken, but the 4wd versions came with higher gearing. It's true that putting smaller tire on will help the MPH as the less weight spinning the better, but it also puts the engine into a higher RPM and that eats more gas.
Only someone who has do thing or is really good with math can answer the question.

It's sort of a toss up. I put lighter street tires of the same size on mine. It helped a few MPG over the knobbies.

From a mechanical perspective, an increase of tire/rim diameter might effect the efficiency of the transfer of energy or torque upon the axle. However, I would speculate that the change would be negligible.

In summary, I would suspect that the change in tire size would have minimal effect on your "actual mileage", but the "measured mileage" could easily vary as a result of calibration issues.
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4WD's come with lower gearing, but lower gearing is expressed by a higher number, which leads to confusion.

A 2WD can have a 3.90 ratio while a 4WD has a 4.10 ratio. The 4.10 is lower gearing than 3.90.