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Fuel Tax Incidence and Supply Conditions

  • Justin Marion
  • Erich Muehlegger

The incidence of taxes on consumers and producers plays a central role in evaluating energy tax policy, yet the literature testing the main predictions of the tax incidence model is sparse. In this paper, we examine the pass-through rate of state gasoline and diesel taxes to retail prices, and importantly we estimate the dependence of pass-through on factors constraining the gasoline and diesel supply chains. We consider several factors that alter the elasticity of supply, including within state heterogeneity in gasoline content requirements, refinery capacity utilization, inventory constraints, and variation in the demand for untaxed uses of diesel. In general, we find that in periods of time when the supply chain is constrained, and the constraint is plausibly unrelated to shifts in demand, the pass-through rate of fuel taxes declines. We describe several potential implications for tax policy, including tax breaks during peak driving season and during times of supply disruptions such as after major hurricanes.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16863.

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Date of creation: Mar 2011
Date of revision:
Publication status: published as Marion, Justin & Muehlegger, Erich, 2011. "Fuel tax incidence and supply conditions," Journal of Public Economics, Elsevier, vol. 95(9), pages 1202-1212.
Handle: RePEc:nbr:nberwo:16863
Note: EEE PE
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  1. Devereux, M.P. & Lockwood, B. & Redoano, M., 2007. "Horizontal and vertical indirect tax competition: Theory and some evidence from the USA," Journal of Public Economics, Elsevier, vol. 91(3-4), pages 451-479, April.
  2. repec:cdl:agrebk:5335 is not listed on IDEAS
  3. Christopher Decker & Mark Wohar, 2007. "Determinants of state diesel fuel excise tax rates: the political economy of fuel taxation in the United States," The Annals of Regional Science, Springer, vol. 41(1), pages 171-188, March.
  4. Joel Slemrod & Shlomo Yitzhaki, 2000. "Tax Avoidance, Evasion, and Administration," NBER Working Papers 7473, National Bureau of Economic Research, Inc.
  5. Robert S. Pindyck, 1990. "Inventories and the Short-Run Dynamics of Commodity Prices," NBER Working Papers 3295, National Bureau of Economic Research, Inc.
  6. 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.
  7. 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.
  8. Chouinard, Hayley & Perloff, Jeffrey M., 2004. "Incidence of federal and state gasoline taxes," Economics Letters, Elsevier, vol. 83(1), pages 55-60, April.
  9. 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.
  10. Bushnell, James & Chong, Howard G. & Mansur, Erin T., 2009. "Profiting from Regulation: An Event Study of the EU Carbon Market," Staff General Research Papers 13139, Iowa State University, Department of Economics.
  11. 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.
  12. Chernick, Howard & Reschovsky, Andrew, 1997. "Who Pays the Gasoline Tax?," National Tax Journal, National Tax Association, vol. 50(2), pages 233-59, June.
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