Price Isn’t Everything: Behavioral Response around Changes in Sin Taxes

Abstract

In traditional economic models, taxes change behavior by changing prices. In empirical analyses,
factors other than price are thought to be relevant, but any non-price factors are usually assumed
to be held constant as taxes vary. We contend that violations of this assumption are expected
when laws are passed changing sin taxes. In support of this claim, we document that state-level
cigarette tax increases are concomitant with increases in anti-smoking appropriations, media
coverage on smoking, lobbying efforts, and place-based smoking restrictions. The influence of
these non-price factors is easily confused with price effects, and we find evidence suggesting that
controlling for them substantially reduces the estimated demand responsivity to the tax itself.

Keywords: tax law, sin taxes, price effects, information effects, behavioral public finance

JEL Classification: D03, H24