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Federal excise tax increase and its effects on U.S. tobacco production

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  • Kelly Tiller
  • Shiferaw Feleke
  • Jane Starnes

Abstract

Using the equilibrium displacement model, we examine the impact on tobacco farms of the decrease in cigarette sales due to the increase in prices induced by the federal excise tax hike that went to effect on April 1, 2009. First we estimate the effect of the increase in the federal excise tax on cigarette price and sales. Then, we estimate the effect of the decrease in cigarette sales on tobacco farms. Results suggest that under a scenario of market power implied by a conjectural elasticity of 0.11 manufactures could charge $0.23 per pack more than the federal excise tax increase, which would be enough to offset the estimated 1.42 billion-pack sales decline and to maintain the industry’s revenue net of taxes. This decrease in cigarette sales induced by the increase in the federal excise tax would result in the tobacco leaf output and price declining by 2.85 and 0.41%, respectively. As a result, the tobacco leaf sector would sustain a loss of 3.25% in revenue, amounting to nearly $48.4 million. Copyright Springer-Verlag 2013

Suggested Citation

  • Kelly Tiller & Shiferaw Feleke & Jane Starnes, 2013. "Federal excise tax increase and its effects on U.S. tobacco production," Empirical Economics, Springer, vol. 44(2), pages 701-717, April.
    • Handle: RePEc:spr:empeco:v:44:y:2013:i:2:p:701-717
    DOI: 10.1007/s00181-011-0538-0
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    More about this item

    Keywords

    Federal excise tax; Cigarettes; Tobacco farms; Market power; D22; D43; Q12;
    All these keywords.

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • Q12 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Micro Analysis of Farm Firms, Farm Households, and Farm Input Markets

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