The odometer is based on the number of rotations. In one rotation, a larger tire will cover a longer distance.

If you're basing your mpg on the odometer with bigger tires, then you're really getting better mileage than you think, because you've gone more miles than your odometer reflects. The amount of gas used obviously hasn't changed.

With 265/70R16s I usually add about 3% to my odometer when calculating MPG.

Also keep in mind that treadwear and inflation also affect the diameter of the tire, stock or otherwise, and will affect the odometer accordingly.

Moral of the story: use a GPS for MPG calculation.

-Daver