Getting into the Weeds of Tax Invariance

We provide the first general empirical test of tax invariance (TIV). When a 25 percent tax remitted by manufacturers was eliminated in Washington state and the retail cannabis excise tax was simultaneously increased from 25 to 37 percent—a shift intended to be revenue-neutral—TIV did not hold. Manufacturers kept two-thirds of their tax savings instead of passing all their savings through to retail firms via lower prices as predicted by TIV. One-third of the retail tax increase was passed on to consumers via higher retail prices – TIV would have predicted constant or even declining tax-inclusive retail prices. Caroline Weber is an Assistant Professor at the University of Kentucky Martin School of Public Policy & Administration. She received her PhD from University of Michigan. She specializes in public finance and applied microeconometrics. Her research focuses on estimating behavioral responses to tax policies. She has published her work in leading field journals including the Journal of Public Economics, Journal of Urban Economics, and International Tax and Public Finance.