Fuel Tax Incidence and Supply Conditions

36 Pages Posted: 7 Mar 2011 Last revised: 31 Mar 2011

See all articles by Justin G. Marion

Justin G. Marion

University of California, Santa Cruz - Division of Social Sciences

Erich Muehlegger

Harvard University - Harvard Kennedy School (HKS)

Date Written: March 2011

Abstract

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.

Suggested Citation

Marion, Justin G. and Muehlegger, Erich, Fuel Tax Incidence and Supply Conditions (March 2011). NBER Working Paper No. w16863. Available at SSRN: https://ssrn.com/abstract=1776798

Justin G. Marion (Contact Author)

University of California, Santa Cruz - Division of Social Sciences ( email )

401 Engineering 2
1156 High Street
Santa Cruz, CA 95064
United States
831-459-2848 (Phone)
831-459-5077 (Fax)

Erich Muehlegger

Harvard University - Harvard Kennedy School (HKS) ( email )

79 John F. Kennedy Street
Cambridge, MA 02138
United States
617-495-7735 (Phone)
617-496-6886 (Fax)

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