Smoke Gets in Your Eyes: Cigarette Tax Salience and Regressivity
Recent work suggests that consumers respond differently to taxes that are included in a good’s posted price and taxes that are added upon checking out at the register. This paper investigates how the government’s choice between these posted and register taxes affects the distribution of a tax’s burden. We show that when high- and low-income consumers differ in their attentiveness to register taxes, policymakers can lessen a tax’s regressivity by manipulating the fraction of a tax that is added at the register. We then turn to the case of cigarettes, and investigate whether high- and low-income consumers do in fact differ in their attentiveness to register taxes on that good. To answer that question, we link state and time variation in cigarette excise and sales tax rates to survey data about cigarette consumption from the Behavioral Risk Factor Surveillance System. Whereas both high- and low-income consumers respond to cigarette excise taxes (which appear in the posted price), we find that only low-income consumers respond to sales taxes on cigarettes (which are added at the register). Our results suggest that policymakers can ease the financial burden of cigarette taxes on the poor by levying such taxes at the register instead of including them in the cigarette’s posted price.
|Date of creation:||Dec 2010|
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