Competition and Incidence: Automotive Fuel Tax Pass-Through at State Borders

I estimate the pass-through of automotive fuel tax changes to nal consumer prices, while accounting for how much of a retail market is covered by a tax change. In Spain, retail taxes on automotive fuel have a state-speci c component. At state borders, then where local competition straddles multiple states a tax hike in one state only a ects the marginal costs of some stations in a market. I show that incidence changes signi cantly when a cost shock is not uniform throughout a market: while average tax pass-through is nearly 100% (i.e., one-for-one) away from state borders, it is reduced to 57% within 5 km of a cross-border rival. At the same time, una ected cross-border rivals actually raise retail prices, which causes some of the state tax's burden to fall on other, neighboring states. The magnitudes of responses on both sides of a border rise in the number and proximity of cross-border rivals. The results show a clear incentive for rms to raise their rivals' costs. More generally, accounting for rm-speci c costs in pass-through estimation can inform both forecasting of (e.g., carbon) tax incidence and analysis of potential mergers.