Fuel Tax Incidence, Supply Conditions and Tax Evasion

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, refinery and inventory constraints. In addition, we estimate the response of tax incidence to two regulatory changes in fuel markets diesel dye regulations, which decreased fuel tax evasion, and gasoline content regulations, which complicated the supply chain by increasing product differentiation. We find that state gasoline taxes, and both state and federal diesel taxes, are fully passed on to consumers, while 65 percent of federal gas taxes are incurred by 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. Finally, we find that only half of the 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. Improvements in diesel tax compliance do not significantly affect incidence, although we find evidence consistent with a change in the method of evasion following the introduction of fuel dye. We find that regional gasoline content regulations affect pass-through we estimate tax pass-through is 23 percentage points lower in a state using two blends of gasoline than a state using one blend of gasoline. The authors thank Erzo Luttmer, Monica Singhal, and seminar participants at Northeastern, UC Santa Cruz, Harvard, Wisconsin and the NBER Economics of Taxation Summer Institute for helpful comments. University of California, Santa Cruz. [email protected] John F. Kennedy School of Government, Harvard University. Erich [email protected].