Reservation Prices: An Economic Analysis of Cigarette Purchases on Indian Reservations

The special legal status of Indian tribes in the United States means that state excise taxes are not necessarily collected on cigarette purchases on Indian reservations. Using novel data from New York surveys that asked directly about cigarette prices and purchases from reservations, we focus on two under-studied but basic empirical economic questions this raises. First, 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, 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.