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Fuel Tax Incidence and Supply Conditions

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  • Marion, Justin

    (University of California, Santa Cruz)

  • Muehlegger, Erich

    (Harvard University)

Abstract

In this paper, we provide new evidence regarding the pass-through of diesel and gasoline taxes to prices, and how the estimated pass-through depends on a variety of supply conditions including a measure of state residual supply elasticity, and refinery and inventory constraints. In addition, we estimate the response of tax incidence to gasoline content regulations, which complicate the supply chain by increasing product heterogeneity. We find that state gasoline and diesel taxes are on average fully passed on to consumers. We also find that the pass-through of diesel taxes is greater in settings where untaxed uses of diesel are more important, which corresponds to times when residual supply is more elastic. We find that only half of the state diesel tax is passed on to consumers when U.S. refinery capacity utilization is above 95 percent. Gasoline taxes, on the other hand, are fully passed through regardless of season or capacity utilization, indicating that a gas tax holiday would provide price relief to consumers. We find that regional gasoline content regulations affect pass-through--we estimate tax pass-through is 22 percentage points lower in a state using two blends of gasoline than a state using one blend of gasoline.

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Bibliographic Info

Paper provided by Harvard University, John F. Kennedy School of Government in its series Working Paper Series with number rwp10-014.

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Date of creation: Apr 2010
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Handle: RePEc:ecl:harjfk:rwp10-014

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  1. Joel Slemrod & Shlomo Yitzhaki, 2000. "Tax Avoidance, Evasion, and Administration," NBER Working Papers 7473, National Bureau of Economic Research, Inc.
  2. Erich J. Muehlegger, 2004. "Gasoline Price Spikes and Regional Gasoline Content Regulations - A Structural Approach," Working Papers 0421, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research.
  3. Devereux, Michael & Lockwood, Ben & Redoano, Michela, 2004. "Horizontal And Vertical Indirect Tax Competition : Theory And Some Evidence From The Usa," The Warwick Economics Research Paper Series (TWERPS) 704, University of Warwick, Department of Economics.
  4. Robert S. Pindyck, 1994. "Inventories and the Short-Run Dynamics of Commodity Prices," RAND Journal of Economics, The RAND Corporation, vol. 25(1), pages 141-159, Spring.
  5. James Alm & Edward Sennoga & Mark Skidmore, 2009. "Perfect Competition, Urbanization, And Tax Incidence In The Retail Gasoline Market," Economic Inquiry, Western Economic Association International, vol. 47(1), pages 118-134, 01.
  6. Chernick, Howard & Reschovsky, Andrew, 1997. "Who Pays the Gasoline Tax?," National Tax Journal, National Tax Association, vol. 50(2), pages 233-59, June.
  7. James B. Bushnell & Howard Chong & Erin T. Mansur, 2009. "Profiting from Regulation: An Event Study of the EU Carbon Market," NBER Working Papers 15572, National Bureau of Economic Research, Inc.
  8. Hamilton, Stephen F., 1999. "Tax incidence under oligopoly: a comparison of policy approaches," Journal of Public Economics, Elsevier, vol. 71(2), pages 233-245, February.
  9. Justin Marion & Erich Muehlegger, 2008. "Measuring Illegal Activity and the Effects of Regulatory Innovation: Tax Evasion and the Dyeing of Untaxed Diesel," Journal of Political Economy, University of Chicago Press, vol. 116(4), pages 633-666, 08.
  10. repec:cdl:agrebk:5335 is not listed on IDEAS
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Cited by:
  1. Nicholas Rivers & Brandon Schaufele, 2012. "Carbon Tax Salience and Gasoline Demand," Working Papers 1211E, University of Ottawa, Department of Economics.
  2. Mark J. Holmes & Jesús Otero & Theodore Panagiotidis, 2012. "On the Dynamics of Gasoline Market Integration in the United States: Evidence from a Pair-Wise Approach," Working Paper Series 68_12, The Rimini Centre for Economic Analysis.
  3. Kolodzeij, Marek & Kaufmann, Robert.K., 2014. "Oil demand shocks reconsidered: A cointegrated vector autoregression," Energy Economics, Elsevier, vol. 41(C), pages 33-40.
  4. Chiou, Lesley & Muehlegger, Eric, 2010. "Consumer Response to Cigarette Excise Tax Changes," Working Paper Series rwp10-020, Harvard University, John F. Kennedy School of Government.
  5. Li, Shanjun & Linn, Joshua & Muehlegger, Erich, 2012. "Gasoline Taxes and Consumer Behavior," Working Paper Series rwp12-006, Harvard University, John F. Kennedy School of Government.
  6. Tuomas Kosonen, 2013. "More haircut after VAT cut? On the efficiency of service sector consumption taxes," Working Papers 49, Government Institute for Economic Research Finland (VATT).
  7. Thomas Klier & Joshua Linn, 2011. "Fuel Prices and New Vehicle Fuel Economy in Europe," Working Papers 1117, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research.
  8. Linn, Joshua, 2014. "Explaining the Adoption of Diesel Fuel Passenger Cars in Europe," Discussion Papers dp-14-08, Resources For the Future.
  9. Li, Shanjun & Linn, joshua & Muehlegger, Erich J., 2012. "Gasoline Taxes and Consumer Behavior," Scholarly Articles 8506866, Harvard Kennedy School of Government.
  10. Natalia Fabra & Mar Reguant, 2013. "Pass-through of Emissions Costs in Electricity Markets," NBER Working Papers 19613, National Bureau of Economic Research, Inc.
  11. Doerrenberg, Philipp & Duncan, Denvil, 2014. "Tax Incidence in the Presence of Tax Evasion," IZA Discussion Papers 8137, Institute for the Study of Labor (IZA).
  12. Klier, Thomas & Linn, Joshua, 2013. "Fuel prices and new vehicle fuel economy—Comparing the United States and Western Europe," Journal of Environmental Economics and Management, Elsevier, vol. 66(2), pages 280-300.
  13. Webster, Allan & Ayatakshi, Sukanya, 2013. "The effect of fossil energy and other environmental taxes on profit incentives for change in an open economy: Evidence from the UK," Energy Policy, Elsevier, vol. 61(C), pages 1422-1431.
  14. Mario Jametti & Agustin Redonda & Anindya Sen, 2013. "The Power to Pass on Taxes - A Test for Tax Shifting based on Observables," Quaderni della facoltà di Scienze economiche dell'Università di Lugano 1301, USI Università della Svizzera italiana.
  15. Wojciech Kopczuk & David J. Munroe, 2014. "Mansion Tax: The Effect of Transfer Taxes on the Residential Real Estate Market," NBER Working Papers 20084, National Bureau of Economic Research, Inc.
  16. Daniel H. Cooper & Byron F. Lutz & Michael G. Palumbo, 2012. "Quantifying the role of federal and state taxes in mitigating wage inequality," Finance and Economics Discussion Series 2012-05, Board of Governors of the Federal Reserve System (U.S.).

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