Local Price Variation and the Tax Incidence of State Lotteries
Thomas A. Garrett
Federal Reserve Bank of St. Louis - Research Division
Federal Reserve Bank of St. Louis
March 7, 2011
Federal Reserve Bank of St. Louis Working Paper No. 2010-035B
This paper explores the seemingly innocuous practice of ignoring the local price vector in empirical models of lottery demand. We argue using consumer theory that local consumption prices should be included and that the failure to consider local prices results in income elasticity of lottery demand estimates that are biased downward. Using a sample of MSAs, we find that, in accordance with our theory, local prices are a significant determinant of lottery sales and the income elasticity of demand for lotteries is greater in magnitude when the local price vector is considered. The degree of lottery regressivity is thus overstated when local prices are omitted. One notable finding is that the tax incidence of lotteries changes from regressive to progressive once the local price vector is included.
Number of Pages in PDF File: 32
Keywords: State Lotteries, Local Prices, Tax Incidence, Regressivity
JEL Classification: H7, H22, L83
Date posted: October 9, 2010 ; Last revised: March 7, 2011
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