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Taxing Marijuana and the Road to Reparations:  Comparing the Colorado and Illinois Cannabis Markets

by Tommaso Carlo Filippo Babucci

Abstract

Although still prohibited at the federal level, cannabis can now be found on the shelves of recreational dispensaries across thirty-three U.S states. This thesis examines the development of this legal market from both historical and empirical perspectives.  Using a new data set, it estimates the determinants of cannabis sales and tax revenues in the Colorado market and analyzes the incidence of a single tax increase. The results, which suggest that legal cannabis behaves like a luxury good, are used to analyze the potential for cannabis-funded reparations programs in Illinois, which recently approved recreational sales of cannabis.

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Advisor: Connel Fullenkamp  | JEL Codes: H2, R50, L15

Federal Excise Taxes and the U.S. Beer Industry’s Three-Tier System of Distribution: Do beer manufacturers benefit from federal excise taxes?

by Ankur Sunildatta Fadia

Abstract 

On January 1, 1991, the federal excise tax on beer increased from $9 to $18 per barrel. Young & Bielinska-Kwapisz (2002) discovered that this $9 per barrel tax increase led to a $15-$17 per barrel increase in the end-of-sale price of beer. No study has yet explained why the beer tax increase was overshifted as it passed through the three tiers, namely manufacturers, distributors, and retailers. I hypothesize that manufacturers cooperate under focal point pricing and pass beer tax increases to distributors and retailers with a markup. Applying Taubman’s (1965) model to the beer industry, I show that manufacturers could have theoretically passed the 1991 beer tax increase with a markup. In support of Taubman’s (1965) model, personal interviews and e-mail exchanges with beer distributors revealed that manufacturers can pass beer tax increases with a markup to both distributors and retailers. PPI and CPI data show that manufacturers and retailers substantially marked up prices to distributors and consumers, respectively. Macrobrewer profit data establish that Anheuser-Busch and Miller’s real net profits between 1990 and 1991 increased, in 1982-84 dollars, by $69 and $3 million, respectively, while Coors’s real net profits decreased by $11 million due to rising costs during its expansion to national production. Since Anheuser-Busch and Miller’s output did not significantly increase but their costs did increase from 1990 to 1991, macrobrewers’ profits could have only increased due to rising prices. Moreover, in a leader-follower game it is expected that profits for the dominant firm, Anheuser-Busch, increase more than profits for fringe firms, Miller and Coors. I accept my hypothesis that manufacturers were responsible for overshifting, and as a whole benefited from, the 1991 beer tax increase.

Professor Phillip J. Cook, Faculty Advisor

JEL Codes: H2, H21,

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