Excise Taxation and Product Quality: The Gasoline Market

Following Barzel (1976), product quality increases in response to unit taxation but remains unchanged by ad valorem taxation. While many tax theorists agree this argument is theoretically sound, empirical support of Barzel’s theory is limited to the cigarette market. This paper tests and confirms his theory in the gasoline market, a market in which Barzel failed to find supporting evidence in his original article. Using a direct test proposed by Sobel and Garrett (1997) and improved data, I find the market shares of premium and mid-grade gasoline rise in response to per-unit taxation but are unaffected by advalorem taxation.