Litigation and the Political Clout of the Tobacco Companies: Cigarette Taxes, Prices, and the Master Settlement Agreement

The goal of our empirical analysis is to assess whether the changes in cigarette excise taxes and cigarette prices can be attributed to litigation brought by the states and the resulting settlements, holding other factors constant. Using pre-post as well as state excise taxes on beer as controls, the evidence provides support for the view that litigation changes the political equilibrium: state cigarette excise taxes were approximately $0.10 higher in the post-MSA period. For tobacco prices, the increases are attributable to the method the settlement used to structure payments as well as the market structure of the cigarette industry.Master Settlement Agreement, excise tax, tobacco

Excise taxes

The author contrasts excise taxes with sales taxes, consumption taxes, licenses, stamp, duties, and other indirect taxes. He describes different types of excises, their relative tax burdens, and how progressive and economically efficient they may be. The main argument for traditional excise taxes, he says, is that they yield substantial revenue with relatively little complaint. A second justification is that the cost of the excessive use of commodities is borne by the purchasers, not by society at large. A third argument is to penalize people for a commodity's use (especially popular with commodities such as alcohol). Arguments against traditional excises: they tend to be regressive, because of the low income elasticity of demand, and they place an unequal burden on families at given income levels. They deprive families of the funds for milk and other essential items, without reducing consumption of taxed goods. High rates tend to increase smuggling and illicit production, often of inferior, even dangerous, substitutes. And the case for them is not strong, resting as it often does on moral grounds. But excise taxes are sure to continue as they yield revenues and are generally more acceptable than other sources of revenue, such as income taxes. Taxes on motor fuel and related motor vehicle levies are among the three most productive excises. They are justified as a charge for the use of roads, in lieu of tolls. In Western Europe, they are seen as progressive, as reaching the people most able to pay -- and incidentally as reducing road congestion. Criticism of such taxes centers on how best to attain desired goals -- for example, sorting out the relative burdens on light and heavy vehicles. Luxury excises tend to be applied to commodities and services with a high income-elasticity of demand, the assumption being that they will reach the people best able to pay them -- achieving equity without relying on increased income taxes, which are difficult to enforce in developing countries and hurt incentives. A luxury excise tax, limited to certain items, is viewed as being progressive, which a sales tax rarely is. But if various rates apply, compliance and administration become complex, and consumers may discriminate among closely related commodities. Moreover, the goods taxed are often widely used by lower income groups (sugar and kerosene are prime examples). For these reasons, many countries are introducing sales taxes, with few rates or a single rate (with exemptions), with simplified processing, and with less ambiguity about what is or is not taxed.Environmental Economics&Policies,Public Sector Economics&Finance,Municipal Financial Management,Urban Economics,Economic Theory&Research

HORIZONTAL AND VERTICAL INDIRECT TAX COMPETITION : THEORY AND SOME EVIDENCE FROM THE USA

This paper provides a simple theoretical framework for analyzing simultaneous vertical and horizontal competition in excise taxes, and estimates equations informed by the theory on a panel of US state and federal excise taxes on cigarettes and gasoline. We also examine the role played by smuggling. The results are generally consistent with the theory, when the characteristics of the markets for the goods are taken into account. For neither good do federal excise taxes affect state taxes. Taxes in neighboring states have a significant and large effect in the case of cigarettes, and a much weaker effect in the case of gasoline. we also find that in the setting of cigarette taxes, concerns about cross-border shopping play a more important role than concerns about smuggling.tax competition ; excise taxes ; cross-border shopping ; smuggling

Revenue raising taxes : general equilibrium evaluation of alternative taxation in U.S. petroleum industries

Should the United States increase taxes and tariffs in the energy sector to reduce its federal deficit? This paper uses a twelve sector general equilibrium model to estimate the fiscal effects, and the effects on welfare and employment, of : (i) a 25 percent import tax on imported crude petroleum oil; (ii) a 15 percent excise tax on petroleum products; and (iii) a combination of the two. The excise tax would be the most efficient revenue raising instrument. The 25 percent import tariff would raise US$7.3 billion, while the 15 percent excise tax would raise US$35 billion. Moreover, each dollar raised through a tariff would come at a loss of 25 cents in welfare. Each dollar raised through an excise tax would come at a loss of only one cent in welfare. Acombination of excise taxes, subsidies, and import tariffs would be the least costly way (in terms of welfare) to raise US$20 billion. The optimal tax structure would involve a tariff and a small subsidy on petroleum products to counteract the distortion induced by a tax on oil - the most important input for petroleum products.Economic Theory&Research,Oil Refining&Gas Industry,Public Sector Economics&Finance,Energy and Environment,Environmental Economics&Policies

Did the Single Market Cause Competition in Excise Taxes? Evidence from EU Countries

The introduction of the Single Market resulted in a switch from destination to origin-based taxation of cross-border transactions by individuals. The theory of commodity tax competition predicts that this change should give rise to excise tax competition and thus intensify strategic interaction in the setting of excise taxes. In this paper, we provide an empirical test of this prediction using a panel data set of 12 EU countries over the period 1987-2004. We find that for all excise duties that we consider (still and sparkling wine, beer, ethyl alcohol, and cigarettes), strategic interaction between countries significantly increased after 1993, consistently with the theoretical prediction. Indeed, for all these products except for cigarettes, there is no evidence of strategic interaction prior to 1993, so our findings are consistent with the hypothesis that the single market caused tax competition. For beer and ethyl alcohol, there is evidence that the minimum taxes, also introduced in 1993, have intensified strategic interaction.tax competition ; excise taxes ; cross-border shopping

Comparison of Georgia's Tobacco and Alcoholic Beverage Excise Tax Rates - Brief

This brief provides a detailed comparison of excise tax rates across the United States. FRC Brief 19

Perfect Competition, Spatial Competition, and Tax Incidence in the Retail Gasoline Market

This report uses monthly gas price data for all 50 U.S. states over the period 1984-1999 to examine the incidence of state gasoline excise taxes. FRC Report 11

Lifetime Incidence and the Distributional Burden of Excise Taxes

This implies that low-income households in one year have some chance of being higher-income households in other years, and significantly affects the estimated distributional burden of excise taxes. This paper shows that household expenditures on gasoline, alcohol, and tobacco as a share of total consumption (a proxy for lifetime income) are much more equally distributed than expenditures as a share of annual income. From a longer-horizon perspective, excise taxes on these goods are therefore much less regressive than standard analyses suggest.

Do Cigarette Taxes Make Smokers Happier?

To measure how policy changes affect social welfare, economists typically look at how policies affect behavior, and use a formal model to infer welfare consequences from the behavioral responses. But when different models can map the same behavior to very different welfare impacts, it becomes hard to draw firm conclusions about many policies. An excellent example of this conundrum is the taxation of addictive substances such as cigarettes. Existing empirical evidence on smoking is equally consistent with two models that have radically different welfare implications. Under the rational addiction model, cigarette taxes make time consistent smokers worse off. But, under alternative time inconsistent models, smokers are made better off by taxes, as they provide a valuable self-control device. We therefore propose an alternative approach to assessing the welfare implications of policy interventions: examining directly the impact on subjective well-being. We do so by matching information on cigarette excise taxation to separate surveys from the U.S. and Canada that contain data on self-reported happiness. And we model the differential impact of excise taxes on those predicted to be likely to be smokers, relative to others, in order to control for omitted correlations between happiness and excise taxation. We find consistent evidence in both countries that excise taxes make predicted smokers happier. This evidence suggests that the time inconsistent model of smoking is more appropriate, and that as a result welfare is improved by higher cigarette taxes.