CROSS-VICE EFFECTS: THE IMPACT OF EXCISE TAXES ON ALCOHOL AND CIGARETTE CONSUMPTION

Abstract

Excise taxes have frequently been proposed as a response to the negative consequences, both to consumers and society at large, of drinking alcohol and smoking cigarettes. Numerous studies have analyzed the impact of these policies on demand for the taxed good. However, much less attention has been paid to cross-price effects or the relationships between consumption patterns for cigarettes and different types of alcohol. Using panel data from all fifty states and the District of Columbia over a 43 year timeframe, this paper employs a fixed effects model to determine the impact of four types of excise taxes on nine indicators of consumer behavior. It is clear from this paper’s results that the relationship between cigarettes and alcohol depends on the type of alcohol being evaluated. Wine and cigarettes seem to be substitutes for one another. Cigarettes are a complement of liquor but the reverse does not necessarily hold. Beer is a complement of cigarettes but, once again, the relationship is not reciprocal. This paper also performs a parallel analysis replicating a study by Cook and Tauchen using more recent data. One component of Cook and Tauchen’s findings is reproduced, while results conflicting with the original paper are found for the other half. Potential reasons for this discrepancy are discussed. Without fully understanding the repercussions of taxes, both on the good being taxed as well as on other interrelated products, it is impossible to make optimal policy decisions. This paper sheds light on one frequently ignored consequence of excise taxes and hopes to remind policy makers to consider all potential effects when evaluating these taxes.