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Excise Taxes, Tax Incidence, and the Flight to Quality

Javier Espinosa () and William Evans

Public Finance Review, 2013, vol. 41, issue 2, 147-176

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.

Keywords: cigarettes; excise taxes; tax incidence; scanner data (search for similar items in EconPapers)
Date: 2013
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Handle: RePEc:sae:pubfin:v:41:y:2013:i:2:p:147-176