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Up in Smoke? The Effect of Excise Taxes on Tobacco Production, Prices and Consumption
  • Nicholas Turner
Excise taxes on tobacco products are one of the main tools that policymakers have to affect tobacco production and consumption. As the statutory incidence of excise taxes are on the manufacturer of tobacco products, the impact of these taxes on consumers and on public health are unclear. In this paper, I examine two key ways that excise taxes may impact tobacco consumption. One, I explore the effect of excise taxes on tobacco production by exploiting a large change in federal excise taxes from a recent law change. Two, I measure the extent to which tobacco excise taxes are passed on to consumers through higher retail prices. The results suggest that both consumers and producers respond to tobacco excise taxes in meaningful ways. I find that tobacco production decreases as a result of excise taxes, with evidence that production shifts across tobacco products in response to tax differentials. The results suggest that a $1.00 increase in cigarette excise taxes leads to a $1.05 increase in the retail price. Exploiting the strong relationship between excise taxes and retail prices, I estimate the price elasticity of demand for cigarettes is between -0.27 and -0.43 using a two-stage least squares estimation.
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Nicholas Turner. "Up in Smoke? The Effect of Excise Taxes on Tobacco Production, Prices and Consumption" (2013)
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