Asymmetric incidence of sales taxes: A short-run investigation of gasoline prices

Abstract

This paper investigates the shifting of sales taxes to consumers through retail prices in the short run. Retail data on gasoline prices are used at the station level within the U.S., including observations from all fifty states and the District of Columbia. A difference-in-differences approach is employed to identify the short-run effects of the changes in state taxes as of January 1st, 2015, when five states have increased their gasoline sales taxes, while five other states have decreased theirs. States experiencing such changes in sales taxes (between December 31st, 2014 and January 1st, 2015) are analyzed as the treatment group of a natural policy experiment, where the control group consists of states with no changes in their sales taxes. The results show that both sales-tax increases and decreases are under-shifted to consumer prices, although the under-shifting of sales-tax decreases is much higher (i.e., the asymmetric incidence of sales taxes). The pass-through measures also differ significantly across states, showing the importance of having a nationwide analysis. The results are robust to the consideration of retailer characteristics, wholesale prices, retail brand effects and hourly price changes within each day.