The Effect of Changes in Alcohol Tax Differentials on Alcohol Consumption

Markus Gehrsitz, Henry Saffer () and Michael Grossman

No 27117, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We show that tax-induced increases in alcohol prices can lead to substantial substitution and avoidance behavior that limits reductions in alcohol consumption. Causal estimates are derived from a natural experiment in Illinois where spirits and wine taxes were raised sharply and unexpectedly in 2009. Beer taxes were increased by only a trivial amount. We construct representative and consistent measures of alcohol prices and sales from scanner data collected for hundreds of products in several thousand stores across the US. Using several differences-in-differences models, we show that alcohol excise taxes are instantly over-shifted by a factor of up to 1.5. Consumers react by switching to less expensive products and increase purchases of low-tax alcoholic beverages, thus all but offsetting any moderate, tax-induced reductions in total ethanol consumption. Our study highlights the importance of tax-induced substitution, the implications of differential tax increases by beverage group and the impacts on public health of alternative types of tax hikes whose main aims are to increase revenue.

JEL-codes: I12 I18 (search for similar items in EconPapers)
Date: 2020-05
New Economics Papers: this item is included in nep-hea, nep-ltv and nep-pub
Note: EH
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Citations: View citations in EconPapers (8)

Published as Markus Gehrsitz & Henry Saffer & Michael Grossman, 2021. "The effect of changes in alcohol tax differentials on alcohol consumption," Journal of Public Economics, vol 204.

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Journal Article: The effect of changes in alcohol tax differentials on alcohol consumption (2021)
Working Paper: The Effect of Changes in Alcohol Tax Differentials on Alcohol Consumption (2020)
Working Paper: The effect of changes in alcohol tax differentials on alcohol consumption (2020)
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