Abstract

http://ssrn.com/abstract=1689582
 


 



Local Price Variation and the Tax Incidence of State Lotteries


Thomas A. Garrett


Federal Reserve Bank of St. Louis - Research Division

Natalia Kolesnikova


Federal Reserve Bank of St. Louis

March 7, 2011

Federal Reserve Bank of St. Louis Working Paper No. 2010-035B

Abstract:     
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

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Date posted: October 9, 2010 ; Last revised: March 7, 2011

Suggested Citation

Garrett, Thomas A. and Kolesnikova, Natalia, Local Price Variation and the Tax Incidence of State Lotteries (March 7, 2011). Federal Reserve Bank of St. Louis Working Paper No. 2010-035B. Available at SSRN: http://ssrn.com/abstract=1689582 or http://dx.doi.org/10.2139/ssrn.1689582

Contact Information

Thomas A. Garrett (Contact Author)
Federal Reserve Bank of St. Louis - Research Division ( email )
411 Locust St
Saint Louis, MO 63011
United States
Natalia Kolesnikova
Federal Reserve Bank of St. Louis ( email )
411 Locust St
Saint Louis, MO 63011
United States
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