Incidence and Salience of Alcohol Taxes

Abstract

We use a unique, geocoded micro data set of retail prices to estimate the incidence of alcohol taxation. We estimate the pass-through of alcohol taxation employing both standard ordinary least squares (OLS) and a regression discontinuity design (RDD), using the abrupt change in excise tax occurring at state borders for identification. Our results show that sales and excise taxes on alcohol have different effects on final consumer price. Our estimates suggest that while 40 percent to 50 percent of sales taxes are passed on to consumers, excise taxes have a negative pass-through rate. Negative rates of pass-through on the excise portion of the alcohol tax are likely the result of consumers overreacting to the tax compared to how they would react to a general price increase, or that the alcohol tax is quite salient for consumers. This effect is particularly strong in areas near state borders when using the RDD estimation strategy.