The impact of fuel tourism on retailers’ diesel price in Spanish neighbouring regions

Abstract

Since 1986, car fuel consumption in Spain has been subject to the Special Hydrocarbons Tax and the Value Added Tax. In addition, since 2002 regional governments have been able to apply a regional excise duty on hydrocarbons. This article analyses the impact that such a regional tax has on the retailer's diesel price at the border of the province of Lugo (in the region of Galicia) and the province of Leon (in the region of Castile Leon) (only the former region has the regional tax). Evidence shows that variations in the price of diesel at the border of Lugo are of the same sign but of lower intensity than at the border of Leon (the price–price elasticity is 0.8060). These results suggest that service stations located in regions with higher excise duties use their price policy to lessen the negative effects generated for fuel tourism.

Keywords:

• fuel tourism diesel
• excise duty
• prices

JEL Classification:

• H24
• H32

Acknowledgements

A preliminary version of this article was published in the Working Papers Collection of Fundación de las Cajas de Ahorros – FUNCAS – (Spanish Saving Banks Foundation) as the Working Paper 430-2008.

Notes

¹ Since the seminal work of Kanbur and Keen (1993) – and the extensions of Christiansen (1994), Wang (1999) and Lucas (2004), among others –, an important corpus of the literature has analysed the behaviour of governments to attract tax bases to their territories from a theoretical perspective.

² The real exchange rate is a key determinant too in cross-border shopping (see, e.g. Di Matteo, 1999).

³ Using a macroeconomic approach, Rietveld and Woudenberg (2005) find that small countries tend to be more aggressive than large countries by charging lower fuel taxes to attract customers from neighbouring countries.

⁴ As an example, Banfi et al. (2005) cited in their paper timely price rebates adopted by Italian petrol stations in the border with Switzerland against fuel tourism.

⁵ An exception is Doyle and Samphantharak (2008) that analyse tax impacts among distributors and final supplier's when fuel taxes are modified.

⁶ For a detailed discussion on the fiscal decentralization in Spain, see, for example, López and Monasterio (2007).

⁷ However, none of the regions (called Autonomous Communities) is applying the above-mentioned maximum rate where this tax is in force. Collections of the regional tax accounts on the average for 2.8% of the total amount of taxes transferred by the Central Government.

⁸ The service stations located in these seven counties have been identified using zip code information available in the database.

⁹ The counties in Leon neighbouring Lugo analysed in this article are Los Ancares, El Bierzo and La Cabrera, whereas those on the Lugo border are La Mariña Oriental, La Consagrada, Los Ancares and Quiroga.

¹⁰ This convergence in prices is consistent with the results for the EU estimated by Dreher and Krieger (2010).

¹¹ In this sense, results by Alm et al. (2009) show that excise taxes are fully passed through in urban states and less than full passed through in rural regions.