Working Paper: NBER ID: w20778
Authors: Philip Decicca; Donald S. Kenkel; Feng Liu
Abstract: The special legal status of Indian tribes in the U.S. means that state excise taxes are not necessarily collected on cigarette purchases on Indian reservations. We focus on two under-studied but basic empirical economic questions this raises. Using novel data from New York surveys that asked directly about cigarette prices and purchases from reservations, we first ask: What is the economic incidence of the tax break? In data from New York over a period when the state did not attempt to collect taxes on reservation purchases, our estimates suggest that the tax break is usually fully shifted to the consumer. The notable exception is on one reservation where a tribal monopoly captures almost half of the tax break. Second, we ask: Has the tax break increased consumer demand for low-quality cigarettes relative to high-quality cigarettes? New York's cigarette tax is a fixed amount per pack, providing an opportunity to test the Alchian and Allen substitution theorem. We find some support for the prediction that the tax break increases consumer demand for lower-quality cigarettes.
Keywords: Cigarette Taxes; Indian Reservations; Tax Incidence; Consumer Demand
JEL Codes: H26; I18
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Tax break on cigarette purchases (H20) | Lower consumer prices (D19) |
| Tax break on cigarette purchases (H20) | Increased consumer demand for low-quality cigarettes (D12) |
| Lower consumer prices (D19) | Increased consumer demand for low-quality cigarettes (D12) |
| Tax break on cigarette purchases (H20) | Increased consumer demand for low-quality cigarettes (D12) |