Behavioral Responses to Spatial Tax Notches in the Retail Gasoline Market

Abstract

I employ a unique data-set on fueling station locations in the United States and their corresponding retail gasoline prices to estimate how state tax discontinuities affect business location decisions and tax incidence. The analysis shows that the expected number of fueling stations on the low-tax side of a state border is between 20 and 30 percent higher than on the high-tax side. Gasoline consumers bear 75 percent of the fuel tax on the high-tax side, as compared to 100 percent on the low-tax side. The effect of the border on station location and tax incidence disappears with 15 miles of distance. These results provide some of the first estimates of the effect of tax discontinuities at borders on the location choices of retailers, their competitors, and consequences for the pass-through of taxes to prices.