1. Public Sector Economics
Over-Shifting in the Cigarette Industry

2. Federal and State Excise Taxes
constant nominal (i.e., no inflation adjustment) amount per pack
occasional state exceptions. eg., Hawaii charged fraction of wholesale price
federal tax owed by manufacturer and state tax owed by wholesaler  wholesale prices include federal but not state tax
1983: first federal hike since 1950’s (8 to 16 cents)
other federal hikes in 1991, 1993, 2002, 2009; now 101 cents
wide variation across states, now from 17 (MO) to 435 (NY)
national average state rates have more than tripled since Dec , from 39 cents to 132 cents

3. Tobacco Master Settlement Agreement
46 states agree with major manufacturers to waive lawsuits in exchange for $4+ billion payments from the industry
each manufacturer’s share of the payment depends on his market share  MSA payments impose a marginal cost on producers, beginning in 1999
marginal cost varies from year to year, from 29 cents (1999) to 40 cents (2002)

4. Cross-Section vs Time Series
cross-section studies show shifting of 1 or 1.1
“law of one wholesale price”
trans-shipping may limit cross-section variation in wholesale prices
even for a monopolist who significantly over-shifts
wholesalers have more incentive to ship than consumers
until recently, major manufacturers had only one (national) wholesale list price. even now, just a few regions
1.1 may only represent over-shifting in wholesale and retail cigarette markets
time series suggests at least 1.3?
April 2009 fed tax increases 62 cents
Over prior year, state taxes increased 12 cents
Cigarette prices increased 97 cents  (97-4)/74 = 1.3
Put 2009 on the scatter; do 2009 with wholesale price

5. The Not-so-holy Grail of Panel Data
Taxes affect wholesale prices, but a panel analysis with year effects holds constant national wholesale prices
E.g., Evans et al (1999)
based on their panel estimates, conclude that the MSA would “eventually increase cigarette prices by 30 cents per pack”
Even while noting that “wholesale prices are set at the national level”
They predicted wrong! Prices immediately increased 45 cents per pack
Evans et al is cited favorably in Chetty’s public econ lectures

6. Specific Taxes Distort the Quality Margin@
this slide is wrong