Panel Paper: Reservation Prices: An Economic Analysis of Cigarette Purchases On Indian Reservations

Saturday, November 9, 2013 : 10:05 AM
Thomas Salon (Washington Marriott)

*Names in bold indicate Presenter

Donald Kenkel, Cornell University, Phillip DeCicca, McMaster University and Feng Liu, Shanghai University
The special legal status of Indian tribes in the U.S. means that state excise taxes are not necessarily collected on cigarette purchases on Indian reservations.  We focus on two under-studied but basic empirical economic questions this raises.  Using novel data from national and New York surveys that asked directly about cigarette prices and purchases from reservations, we first ask:   What is the economic incidence of the tax break?  In national data, we find evidence that the tax break is often approximately fully shifted to the consumer.  However, the patterns are complex due to the variety of approaches different states have taken towards taxing reservation purchases.  In data from New York over a period when the state did not attempt to collect taxes on reservation purchases, our estimates suggest that the tax break is usually fully shifted to the consumer.  Second, we ask:  Has the tax break increased consumer demand for low-quality cigarettes relative to high-quality cigarettes?    New York’s cigarette tax is a fixed amount per pack, providing an opportunity to test the Alchian and Allen substitution theorem.  We find some support for the prediction that the tax break increases consumer demand for lower-quality cigarettes.