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The effect of changes in alcohol tax differentials on alcohol consumption

Author

Listed:
  • Markus Gehrsitz

    () (Department of Economics, University of Strathclyde & IZA)

  • Henry Saffer

    (NBER)

  • Michael Grossman

    (NBER, CUNY Graduate Center & IZA)

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 difference-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.

Suggested Citation

  • Markus Gehrsitz & Henry Saffer & Michael Grossman, 2020. "The effect of changes in alcohol tax differentials on alcohol consumption," Working Papers 2007, University of Strathclyde Business School, Department of Economics.
  • Handle: RePEc:str:wpaper:2007
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    1. Jakub Sopko, 2020. "An overview of selected risk factors for health in OECD countries," Proceedings of Economics and Finance Conferences 10913074, International Institute of Social and Economic Sciences.

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    More about this item

    Keywords

    Health; Alcohol; Excise Taxes; Sin Taxes; Externalities; Difference-in-Differences;
    All these keywords.

    JEL classification:

    • I12 - Health, Education, and Welfare - - Health - - - Health Behavior
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D62 - Microeconomics - - Welfare Economics - - - Externalities

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