Excise Taxes, Tax Incidence, and the Flight to Quality: Evidence from Scanner Data

Because excise taxes are independent of product price, rate hikes are predicted to lower the relative cost of high-priced goods, encouraging a shift toward their purchase. Using scanner data on cigarette sales from twenty-nine states over a six-year period, we examine whether tax hikes encourage a flight to quality. Results demonstrate that a one-cent hike in taxes increases retail prices of name-brand and generic cigarettes by exactly one cent. We find no tax-induced substitution toward name brands but a large substitution away from carton to pack sales, suggesting that tax hikes encourage within-product changes in purchase but little between-product substitution.