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Local Price Variation and the Tax Incidence of State Lotteries

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

32 Pages Posted: 9 Oct 2010 Last revised: 7 Mar 2011

Thomas A. Garrett

Federal Reserve Bank of St. Louis - Research Division

Natalia Kolesnikova

Federal Reserve Bank of St. Louis

Date Written: March 7, 2011

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.

Keywords: State Lotteries, Local Prices, Tax Incidence, Regressivity

JEL Classification: H7, H22, L83

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: https://ssrn.com/abstract=1689582 or http://dx.doi.org/10.2139/ssrn.1689582

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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