TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Tuesday, April 15, 2014

Rao Presents The Tax Policy Implications of State Facilitated Collusion in the Alcohol Market Today at NYU

RaoNirupama Rao (NYU) presents The Price of Liquor is Too Damn High: State Facilitated Collusion and the Implications for Taxes (with Christopher T. Conlon (Columbia) at NYU today as part of its Tax Policy Colloquium Series hosted by Daniel Shaviro and Alan Auerbach:

Alcohol markets are subject to both heavy regulation as well as excise taxes at the federal and state level. We examine the impact of particular state regulations on the structure of the alcohol market and the consequences for tax eciency. We show that post and hold and meet but not beat pricing regulations at the wholesale level facilitate non-competitive pricing by wholesalers. Wholesalers will tend to mark up premium brands relative to call or well products. The distortion of premium brands generally exceeds the distortions resulting from optimally set taxes, particularly when states attempt to address any negative externality of alcohol consumption. Regression results and tabulations indicate that that states featuring post and hold regulations consume 4% to 10% less alcohol than other states, that premium products comprise a smaller share of consumption and that wholesaler pricing is consistent with non-competitive behavior. We use new monthly data describing prices and quantity for hundreds of products to estimate alcoholic beverage demand and use these estimates to assess the impact of replacing these regulations with higher taxes. Our ndings suggest that the state of Connecticut could raise three to six times their current alcohol tax revenue by eliminating these regulations and increasing taxes such that total alcohol consumption was unchanged. In addition to redirecting surplus from wholesalers to the taxing authority, these alternative policies increase consumer surplus by reducing distortions in consumer product choices. The state can e ectively raise much more revenue and improve consumer welfare by replacing alcohol regulations with taxation

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