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Excise Taxes, Tax Incidence, and the Flight to Quality

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  • Javier Espinosa
  • William N. Evans

Abstract

Because excise taxes are independent of product price, rate hikes are predicted to lower the relative cost of high-priced goods, encouraging a shift toward their purchase. Using scanner data on cigarette sales from twenty-nine states over a six-year period, we examine whether tax hikes encourage a flight to quality. Results demonstrate that a one-cent hike in taxes increases retail prices of name-brand and generic cigarettes by exactly one cent. We find no tax-induced substitution toward name brands but a large substitution away from carton to pack sales, suggesting that tax hikes encourage within-product changes in purchase but little between-product substitution.

Suggested Citation

  • Javier Espinosa & William N. Evans, 2013. "Excise Taxes, Tax Incidence, and the Flight to Quality," Public Finance Review, , vol. 41(2), pages 147-176, March.
    • Handle: RePEc:sae:pubfin:v:41:y:2013:i:2:p:147-176
    DOI: 10.1177/1091142112460724
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    References listed on IDEAS

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    Cited by:

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    2. Lesley Chiou & Erich Muehlegger, 2014. "Consumer Response to Cigarette Excise Tax Changes," National Tax Journal, National Tax Association;National Tax Journal, vol. 67(3), pages 621-650, September.
    3. Blum, Bianca, 2020. "Fleischbesteuerung in Deutschland - Mengen- oder Mehrwertsteuer? Diskussion und Politische Implikationen," The Constitutional Economics Network Working Papers 01-2020, University of Freiburg, Department of Economic Policy and Constitutional Economic Theory.
    4. Serhan Cevik, 2018. "Smoke screen: Estimating the tax pass‐through to cigarette prices in Pakistan," Review of Development Economics, Wiley Blackwell, vol. 22(3), pages 1-15, August.
    5. Philip DeCicca & Donald Kenkel & Feng Liu, 2015. "Reservation Prices: An Economic Analysis of Cigarette Purchases on Indian Reservations," National Tax Journal, National Tax Association;National Tax Journal, vol. 68(1), pages 93-118, March.
    6. Caitlan Russell & Corne van Walbeek, 2016. "How does a change in the excise tax on beer impact beer retail prices in South Africa?," SALDRU Working Papers 162, Southern Africa Labour and Development Research Unit, University of Cape Town.
    7. Gallego, Juan M. & Llorente, Blanca & Maldonado, Norman & Otálvaro-Ramírez, Susana & Rodríguez-Lesmes, Paul, 2020. "Tobacco taxes and illicit cigarette trade in Colombia," Economics & Human Biology, Elsevier, vol. 39(C).

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