The Effect of Changes in Alcohol Tax Differentials on Alcohol Consumption

55 Pages Posted: 27 May 2020 Last revised: 18 Jan 2021

See all articles by Markus Gehrsitz

Markus Gehrsitz

University of Strathclyde; IZA Institute of Labor Economics

Henry Saffer

National Bureau of Economic Research

Michael Grossman

National Bureau of Economic Research (NBER), NY Office; CUNY The Graduate Center - Department of Economics

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Date Written: April 28, 2020

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.

Keywords: alcohol, tax, pass-through, substitution, policy

JEL Classification: I18, I12

Suggested Citation

Gehrsitz, Markus and Saffer, Henry and Grossman, Michael, The Effect of Changes in Alcohol Tax Differentials on Alcohol Consumption (April 28, 2020). Available at SSRN: https://ssrn.com/abstract=3587926 or http://dx.doi.org/10.2139/ssrn.3587926

Markus Gehrsitz

University of Strathclyde ( email )

Department of Economics
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Glasgow, G4 0QU
United Kingdom

HOME PAGE: http://www.markusgehrsitz.com

IZA Institute of Labor Economics ( email )

P.O. Box 7240
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Henry Saffer

National Bureau of Economic Research ( email )

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Michael Grossman (Contact Author)

National Bureau of Economic Research (NBER), NY Office ( email )

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CUNY The Graduate Center - Department of Economics ( email )

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HOME PAGE: http://mgrossman.ws.gc.cuny.edu

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