Just passing through: the effect of the Master Settlement Agreement on estimated cigarette tax price pass-through

In 1998, cigarette manufacturers and state attorneys general in the United States settled a group of lawsuits in an agreement known as the Master Settlement Agreement (MSA). Among the provisions of this agreement were a set of mandated escrow payments to the states that would be based on cigarette s...

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Bibliographic Details
Published in:Applied economics letters 2013-03, Vol.20 (4), p.353-357
Main Authors: Lillard, Dean R., Sfekas, Andrew
Format: Article
Language:English
Subjects:
Agreements
Cigarette industry
cigarette tax
Cigarettes
Economic agreements
Economic analysis
Excise taxes
Master Settlement Agreement
pass-through
Payments
Prices
Sales taxes
Settlements & damages
Smoking
Studies
tax elasticity
Taxes
U.S.A
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Summary:In 1998, cigarette manufacturers and state attorneys general in the United States settled a group of lawsuits in an agreement known as the Master Settlement Agreement (MSA). Among the provisions of this agreement were a set of mandated escrow payments to the states that would be based on cigarette sales. The result of these provisions is that the apparent relationship between taxes and prices changed substantially following implementation of the MSA. This article estimates whether the MSA escrow amounts are reflected in prices and compares the pass-through rate of state and federal cigarette taxes only and the rate when one adds escrow payments. We find much different pass-through rates for the two measures. State and federal taxes are not fully passed to smokers. In years that escrow payments were made, cigarette prices increased by more than the sum of the state and federal taxes and the escrow payments.
ISSN:1350-4851
1466-4291
DOI:10.1080/13504851.2012.705422