Excise tax base management in the oil industry

This study investigates excise tax base management in the oil industry. Drawing on economic theory concerning tax pass-through rates and demand elasticity, we hypothesize that firms manage the excise tax base to mitigate the threat of an excise tax increase. This study uses a quasi-experimental difference-in-differences research design, exploiting the exogenous shock created by the impending insolvency of the U.S. Highway Trust Fund and the ensuing 2005 SAFETEA-LU legislative debate, which raised a credible threat of an excise tax increase. Analyzing quarterly data from 2002 to 2007, we find that, relative to non-U.S. oil firms, U.S. firms accelerate sales and increase production and inventories during the debate window. The evidence suggests that firms manage the excise tax base and build inventories in anticipation of a potential rate hike. The effects are stronger among petroleum refiners than among exploration and production firms. Overall, the study contributes to research on consumption taxes by showing how firms manage non-income tax bases through operational decisions.