Who Bears the Burden of Energy Taxes? The Critical Role of Pass-Through

Abstract:

Existing estimates of energy tax incidence assume that the pass-through of taxes to final consumer prices is uniform across the affected population. I show that, in fact, variation in local market conditions drives significant heterogeneity in pass-through, and ignoring this can lead to mistaken conclusions about the distributional impacts of energy taxes. I use data from the Spanish retail automotive fuel market to estimate station-specific pass-through, focusing on the effects of competition and wealth. A novel informational mandate provides access to a national, station-daily panel of retail diesel prices and characteristics and allows me to investigate market composition at a fine level. Event study and difference-in-differences regression reveal that, while retail prices rise nearly one-for-one (100%) with taxes on average, station-specific pass-through rates range from at least 70% to 115%. Greater market power – measured by brand concentration and spatial isolation – is strongly associated with higher pass-through, even after conditioning on detailed demand-side characteristics. Furthermore, pass-through rises monotonically in area-average house prices. While a conventional estimate of the Spanish diesel tax burden suggests roughly equivalent incidence across the wealth distribution, overlaying the effect of heterogeneous pass-through reveals the tax to be unambiguously progressive.