Working Paper: NBER ID: w12266
Authors: Joseph J. Doyle Jr.; Krislert Samphantharak
Abstract: 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's 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's drive into neighboring states.
Keywords: No keywords provided
JEL Codes: H2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| tax suspension (H26) | retail gas prices (L97) |
| tax reinstatement (H20) | retail gas prices (L97) |
| tax changes (H26) | cross-border pricing (F16) |
| tax increases (H29) | prices up to an hour's drive into neighboring states (R48) |
| tax decreases (H29) | full pass-through rejection (D52) |
| tax increase in Illinois (H79) | full pass-through rejection (D52) |