$2.00 Gas! Studying the Effects of a Gas Tax Moratorium
Joseph J. Doyle Jr.
Massachusetts Institute of Technology (MIT) - Economics, Finance, Accounting (EFA); National Bureau of Economic Research (NBER)
University of California, San Diego - School of Global Policy and Strategy
NBER Working Paper No. w12266
There are surprisingly few estimates of the effect of sales taxes on retail prices, especially at the firm level. Further, along both sides of a state border, a change in one state%u2019s sales tax can shed light on the nature of competition, as a subset of firms effectively experiences a change in its marginal cost. This paper considers the suspension, and subsequent reinstatement, of the 5% gasoline sales tax in Illinois and Indiana following a temporary price spike in the spring of 2000. Earlier laws set the timing of the reinstatements, providing plausibly exogenous changes in the tax rates. Using a unique dataset of daily, gas station-level data, retail gas prices are found to drop by 3% following the suspension, and increase by 4% following the reinstatements. After linking the stations to driving distance data, some evidence suggests that the tax increases are associated with higher prices up to an hour%u2019s drive into neighboring states.
Number of Pages in PDF File: 54
Date posted: June 1, 2006