Working Paper: NBER ID: w27117
Authors: Markus Gehrsitz; Henry Saffer; Michael Grossman
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.
Keywords: Alcohol Taxation; Consumption; Public Health
JEL Codes: I12; I18
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Tax-induced increases in alcohol prices (H29) | Substantial substitution behavior among consumers (D11) |
| 2009 tax increases in Illinois (H29) | Price increase for spirits and wine (L66) |
| Price increase for spirits and wine (L66) | Switch to less expensive products (D12) |
| Switch to less expensive products (D12) | Increase purchases of low-tax alcoholic beverages like beer (L66) |
| 2009 tax increases in Illinois (H29) | Decrease in spirits consumption (L66) |
| 2009 tax increases in Illinois (H29) | Decrease in wine consumption (L66) |
| Decrease in spirits consumption (L66) | Overall ethanol consumption (Q42) |
| Decrease in wine consumption (L66) | Overall ethanol consumption (Q42) |
| Increase purchases of low-tax alcoholic beverages like beer (L66) | Overall ethanol consumption (Q42) |