The Pass-Through of Beer Taxes to Prices: Evidence from State and Federal Tax Changes

I. INTRODUCTION Alcohol excise taxes are a common form of taxation used by the federal government and state governments alike, serving the dual purpose of raising revenue and protecting the public health through reduced consumption. (1) From a policy perspective, it is crucial to understand how alcohol taxes are passed through to prices if higher taxes are to be levied. Standard economic theory predicts that taxes are at most fully passed through in a competitive market where firms are price takers. However, the market for beer in the United States can be best categorized as an oligopoly, and beer stands out as the most prevalent type of alcohol consumed in the country. (2) Theories in imperfect competition suggest various possibilities of tax shifting including over- and under-shifting to prices. In oligopolistic markets, as Fullerton and Metcalf (2002) discuss, an over-shifting of tax can occur because of both the existence of market power and the strategic behavior of firms. Under-shifting is also possible when the burden of higher taxes is shifted to labor in the form of lower wages or to other factors of production. Ultimately, the amount of the tax pass-through is an empirical question, and therefore, the main goal of this study is to provide new estimates of the magnitude of the beer tax pass-through to prices in the United States. When legislators consider changing beer taxes, precise and recent estimates of the pass-through rate are required to understand how the tax change will affect retail prices. To our knowledge, there are only a few existing studies that empirically estimate the pass-through rate of alcohol taxes to prices in the United States. Using quarterly state-level data from 1982 to 1997, Young and Kwapisz (2002) find that taxes on beer, spirits, and wine are over-shifted to retail prices. Specifically, the authors estimate that a $1 increase in the tax per barrel of beer increases the retail beer price by a range of $1.67-1.88. Kenkel (2005) uses the 2002 tax hike in Alaska to perform before-after analyses and concludes that alcohol taxes are more than fully passed through to prices. Kenkel finds that the average pass-through rate for off-premise consumption is 2.14, 2.03, and 1.57 for Budweiser, Bud Light, and Heineken, respectively. Although a novel study in various ways, the lack of a control group and the study's focus just on Alaska raises questions regarding the external validity of the results. Stehr (2007) uses price data from the third quarter editions of the American Chamber of Commerce Research Association (ACCRA) from 1990 to 2004 and finds that the magnitude of the pass-through of beer taxes to prices is 0.94. This point estimate suggests that beer taxes are almost fully passed through to prices and a confidence interval around the estimate includes values greater than one. However, Stehr's study only includes state and year fixed effects in the model as additional control variables and excludes other potential determinants of both alcohol prices and taxes. Also, it is unclear as to why the study only uses the third quarter editions of ACCRA, when tax changes may occur any time during the year. Reflecting on the existing studies in the United States, it must be emphasized that the most recent data used ends in 2004. Since then, the beer industry has experienced two major mergers of leading producers--SABMiller and Coors in 2007 followed by Anheuser-Busch and InBev in 2008. Given this restructuring within the industry, new estimates of the tax pass-through rate are warranted. In terms of studies outside the United States, Bergman and Hansen (2010) analyze the tax pass-through rate in Denmark using the liquor tax cut in 2003, the beer tax increase in 1997, and the beer tax cut in 2005. The authors find evidence of over-shifting during the incidence of tax hikes and under-shifting during the events of tax cuts. Carbonnier (2013) studies differences between the ad valorem taxes and per unit excise taxes in France and finds that the per unit excise taxes are over-shifted whereas ad valorem taxes are under-shifted to prices. …