Are Alcohol Tax Hikes Fully Passed Through to Prices?

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DESCRIPTION (provided by applicant): The State of Alaska is about to: increase taxes on malt beverages from $0.35 per gallon to $1.07 per gallon; increase taxes on wine from $0.85 per gallon to $2.50 per gallon; and increase taxes on spirits from $5.60 per gallon to $12.50 per gallon. The net effect of the legislated changes is that a standard drink of beer, wine or spirits will be taxed at approximately 10 cents per standard drink. The proposed innovative research project will take advantage of this time-limited opportunity to study a very basic question: What is the impact of the tax hike on the prices of alcoholic beverages? The project's first specific aim is to describe comprehensively the impact of the Alaskan tax hike on alcoholic beverage prices. We will compare prices before and after the tax hike to determine the extent to which the tax increases prices on average and whether it changed the range of prices. The average and range of prices will be examined before and after the tax hike: (1) across beverage types (beer, wine, spirits); (2) across brands; and (3) across premise type (on-premise, off-premise). The project's second specific aim is to conduct a preliminary investigation of the extent to which the impact of the tax hike on prices varies due to different market conditions. Economic research on tax shifting suggests the hypothesis that taxes are passed through to prices at different rates depending upon market competitiveness. Econometric analysis of prices before and after the tax hike will be conducted to test two predictions: a) that the tax hike is fully passed through to consumer prices in competitive local retail markets, and b) that the tax hike is passed through to prices at a different rate in imperfectly competitive local retail markets. To complete the project's specific aims, the research team will collect primary data on alcoholic beverage prices in the State of Alaska. We propose to conduct a telephone survey of the census of on-premise and off-premise alcohol retail establishments in that State. The proposed survey will be identical to a survey currently in progress that will provide data on alcoholic beverage prices before the tax hike. Because so little is known about the impact of an alcohol tax hike on prices, these exploratory data and the preliminary analysis will be informative for policy and for future research in alcohol studies and economics.