BLUF:
Firearms and ammo taxes do nothing but generate revenue and don’t stop crime or violence.

Firearm and Ammunition Taxes

Taxation is a policy lever frequently used as a means to influence social welfare and well-being. For example, excise taxes on alcohol, gasoline, and cigarettes are intended to discourage consumption of these goods and subsequently reduce external harms associated with their consumption (e.g., injury, pollution, health care costs) (Hines, 2007). Taxation is also a revenue-generating mechanism, whereby revenues can be used to fund programs aligned with the purpose of the tax (e.g., earmarking tobacco tax revenues to support anti-tobacco education efforts), to cover costs related to the taxed activity (e.g., using gasoline tax revenues to maintain transportation infrastructure), to offset burdens generated by the tax (e.g., reducing taxes elsewhere), or to support other public aims (Marron and Morris, 2016). A wide body of research has found that taxation can serve as an effective policy lever for reducing consumption and consumption-related harms.^[1] However, whether taxes change consumption varies and depends on the product being taxed (Wagenaar, Salois, and Komro, 2009), consumer characteristics (e.g., age, income, level of consumption) (Chaloupka, Yurekli, and Fong, 2012; Nelson, 2014), the visibility of the tax (i.e., tax salience) (Chetty, Looney, and Kroft, 2009; Finkelstein, 2009), and the availability of similar products not subject to the tax (Chaloupka, Powell, and Warner, 2019). Raising commodity taxes in various markets has been shown to reduce consumption and increase revenue (Chaloupka, Powell, and Warner, 2019), but uneven application of taxes across jurisdictions can result in tax avoidance (e.g., cross-border shopping) or tax evasion (e.g., interstate smuggling) behaviors that partially undermine the goals of the policy and may promote illicit manufacturing and trade (Joossens and Raw, 2012; Bate, Kallen, and Mathur, 2020).^[2] There are also equity considerations: Uniform application of a commodity tax tends to be regressive, whereby lower-income individuals are disproportionately burdened by the tax (Hines, 2007; Allcott, Lockwood, and Taubinsky, 2019).

This essay synthesizes the limited research that has been conducted on firearm and ammunition taxes in the United States. It first discusses some of the conceptual considerations in the role of taxation as gun violence prevention policy. It then briefly describes some of the existing variation in firearm and ammunition taxes in the United States. The essay concludes with a discussion of existing empirical evidence relevant for understanding the potential effects of firearm and ammunition taxes.

Conceptual Considerations

Conceptually, the societal effects of increasing taxes on firearms or ammunition will hinge on how consumers respond to the tax, which depends on the magnitude and salience of the tax, how changes in tax translate to changes in price (i.e., the tax pass-through rate), how responsive gun purchasers are to changes in price (i.e., demand elasticity), and how this varies for different types of purchasers (e.g., those using firearms for recreational, self-protection, self-harm, or criminal purposes). In addition, because firearm and ammunition transactions occur through both formal and informal channels, there is a need to understand price linkages between the formal and informal markets.^[3]

If the goal of the tax is to reduce societal harms of gun violence, an optimal policy design would impose differential taxes across firearm or ammunition types based on their probable use or lethality (similar to how alcohol taxes may differ for spirits, wine, or beer) (Gehrsitz, Saffer, and Grossman, 2020) and across individuals based on their propensity to misuse a firearm (Cook and Leitzel, 1996). For the former, differential tax rates could be applied based on caliber, magazine size supported, or concealability (Cook and Leitzel, 1996), although the effectiveness of the policy will depend on the extent to which these distinctions map onto risk of harm, including self-harm, as well as the availability of comparable products subject to lower tax rates. For the latter, given that it is highly unlikely that differential taxation by individual risk could be effectively implemented,^[4] a uniformly applied tax would tend to overtax lower-risk purchasers and under-tax higher-risk purchasers (Diamond, 1973; Knittel and Sandler, 2018). But even these categories are problematic; for instance, the risk of suicide among gun purchasers is elevated even one year after the purchase (Wintemute et al., 1999; Studdert et al., 2020), suggesting that some high-risk purchasers may not be high risk at the time of purchase. If those who use firearms for nonviolent or legal, protective purposes are more responsive to changes in price than are those whose use engenders harm to themselves or others, this would mitigate the effectiveness of the tax as a means for gun violence prevention. Tax implications are further complicated if demands for different types of purchasers are interrelated (e.g., if reduced purchasing of guns for self-defense changes demand among those who seek to use guns for criminal purposes) (for theoretical models of these dynamics, see McDonald, 1999; Ehrlich and Saito, 2010). Furthermore, if individuals who use firearms for violent, non-legal purposes are most likely to obtain weapons or ammunition from illegal (untaxed) sources, the proximate burden of a tax would largely fall on those whose use is less related to harms. However, given connections between formal and informal firearm and ammunition markets, a tax imposed on the formal market would still be expected to increase prices in informal markets (Cook and Leitzel, 1996).

The existence of multiple channels for acquiring firearms or ammunition, each of which may be differentially exposed to a given tax policy, also creates the need to consider potential tax avoidance behavior. For example, some have voiced concern that increased local taxes will push legal consumers and suppliers to conduct business outside city limits (Beekman, 2015). In addition, others have noted the potential for taxes levied on federal firearms licensees (FFLs) to shift sales from FFLs to private sellers (McClelland, 2018), which in some states do not require background checks at the point of transfer (for more, see Smart et al., 2020, Chapter Eight). Finally, if substantial state variation in taxes results in large price differentials, this may create incentives for interstate trafficking of firearms or ammunition. Some studies have shown evidence that crime guns flow from states with more-permissive firearm policies to states with more-restrictive policies (Kahane, 2013, 2020; Knight, 2013; Collins et al., 2018), which suggests that markets for firearms used for criminal purposes respond to cross-state cost differentials. However, these studies evaluated firearm policies (e.g., background checks, firearm purchase prohibitions) that impose nonmonetary access costs, and it is unclear the extent to which similar responses may occur in the existence of cross-state differences in monetary costs of firearms and ammunition.

The discussion in this section largely considers conceptual implications that would apply to taxing both firearms and ammunition. However, because guns are durable goods (i.e., they tend to last for a long time), the consequences of policies affecting the price of firearms may be different from the consequences of policies affecting the price of ammunition.^[5] Given the large existing stock of privately owned firearms in the United States, estimated to be between 265 million and 390 million (Cook and Goss, 2014; Azrael et al., 2017; Karp, 2018), a tax on firearms may take far longer to have a meaningful impact on firearm use relative to a tax on ammunition.^[6] If a change in tax policy is announced with some lag prior to implementation, individuals may find it easier to shift the timing of their firearm purchases to precede the tax than to foresee future ammunition needs (Kremer and Willis, 2016). However, given that regulations for ammunition are relatively less stringent than those for firearms are (e.g., at the federal level, ammunition sellers do not need to be licensed, and ammunition purchasers are not subject to background checks) (Tita et al., 2006), there may be greater challenges to preventing tax avoidance or evasion for ammunition purchases. There are also potential differences in the effects of firearm versus ammunition taxes because of variation in how they influence, for example, the distribution of tax incidence across different purchaser types (e.g., sport shooters may purchase fewer firearms but high volumes of ammunition), purchasing and re-trade decisions, and availability and prices in informal markets.

Current Policy

Understanding the potential consequences of higher taxes on guns and ammunition is important both for considering policies moving forward and for assessing laws that increase the effective price of legal gun purchases. For example, permit-to-purchase laws do not increase the price of firearms themselves, but there is a cost associated with obtaining a permit, which is a requirement for legal purchase (Cook and Leitzel, 1996). However, there is very little historic precedent for using taxation to manage harms associated with gun violence to inform these issues. A federal excise tax of 10–11 percent on the import and production of firearms and ammunition has been in place since 1919, but the rate has not been changed since it was first instituted. The National Firearms Act of 1934 imposed a $200 tax on manufacturers for the transfer of certain firearms, but the tax applied to a very narrow set of weapons and has not been changed since initial enactment. Revenues from federal excise taxes fund matching grants to states and territories to support wildlife conservation efforts and education programs for hunters; receipts from the National Firearms Act taxes are put into the General Fund of the Treasury (Crafton, Gravelle, and Krouse, 2018).

Few states impose special taxes on guns and ammunition over the standard sales tax.⁷ Pennsylvania adds a $3 surcharge on firearms subject to the sales tax, and revenues are deposited into the state background check system (Pinho and Rappa, 2013). Tennessee imposed a $0.10 special privilege tax for use, possession, and sales of shotgun shells of metallic cartridges, but this tax was repealed, effective July 1, 2019.

Local jurisdictions have recently taken action to directly influence the prices of guns and ammunition. In January 2016, Seattle, Washington, began collecting taxes of $25 at the point of sale for each firearm and $0.02 to $0.05 for each round of ammunition sold within city limits. Cook County, Illinois, which passed a $25 tax on firearms in 2013, implemented a similar tax increase on ammunition of $0.01 to $0.05 per cartridge in June 2016.

Although these local tax increases were primarily intended as revenue-generating mechanisms to fund public safety or gun violence prevention, larger tax hikes have occasionally been proposed as a preventive mechanism to reduce new purchases of firearms or ammunition and limit gun violence. Most proposed state and local measures to this effect have not passed, but in April 2016, the Northern Mariana Islands (a U.S. territory) passed a provision imposing a $1,000 tax on pistols; later that year, a federal judge struck down the excise tax as imposing undue burden on individuals’ ability to exercise their constitutional rights.⁸

Empirical Evidence

Several factors complicate evaluating firearm taxation policy and the price sensitivity of demand for guns or ammunition. First, although several studies have examined the theoretical consequences of increasing the price of firearms (see, for example, Cook and Leitzel, 1996; Chaudri and Geanakoplos, 1998; McDonald, 1999; Ehrlich and Saito, 2010), because few policy changes have occurred over time or across jurisdictions to change the price of firearms or ammunition, research has faced insufficient variation to empirically estimate the price responsiveness of participants in gun markets. Second, in the absence of exogenous price shocks (i.e., in which the price of firearms or ammunition changes as a result of external factors, such as the cost of material used to manufacture firearms), researchers cannot disentangle changes in consumer demand that are driven by changes in price from changes in price that are driven by changes in consumer demand (e.g., increases in sales that occur after high-profile mass public shootings) (Levine and McKnight, 2017; Studdert et al., 2017; Liu and Wiebe, 2019). And third, the market for firearms is highly differentiated, and there are no publicly available gun or ammunition price data over a sufficient period to support policy analysis (National Research Council, 2004). A few data sources provide information on national average prices of guns and ammunition,^[9] but these averages obscure notable price variation across jurisdictions and offer only a rough approximation of the retail prices that consumers face. Thus, these data have generally been used to evaluate how demand shocks influence prices and not to estimate how responsive consumers are to changes in prices (Koper and Roth, 2002).

The few data sources that exist also apply solely to the formal market and provide little insight into linkages between the formal and informal markets, which limits analysis of how price changes in the formal market would affect criminal markets for firearms or ammunition. Theoretically, price changes in the primary market should affect informal markets; for example, significant price increases in formal markets may increase demand in informal markets. One study of street gun prices paid by members of criminal markets in Boston found a strong positive correlation between street gun price and the gun’s legal market price (measured by Blue Book values), with street prices substantially marked up over the legal price, although the relationship weakened for guns with Blue Book prices above $350 (Hureau and Braga, 2018).

However, some evidence suggests that the informal market for firearms operates quite differently from the formal market. For instance, qualitative interviews with adult male detainees in Cook County Jail in Chicago found that 40 percent of inmate respondents acquired firearms through means other than purchase or trade (Cook, Parker, and Pollack, 2015), most commonly through borrowing or sharing arrangements. The importance of social networks in illegal gun markets has been found in other studies (Sheley and Wright, 1993; Kennedy, Piehl, and Braga, 1996; Cook et al., 2007; Vittes, Vernick, and Webster, 2012; Chesnut et al., 2017). Though less well-studied, illegal markets for ammunition also appear to be distinct. An ethnographic study of participants in underground gun markets in Chicago found that individuals faced long wait times for obtaining ammunition through illegal markets, and street prices were marked up considerably relative to legal prices (Cook et al., 2007). Yet, in a more recent survey of male inmates from Chicago who had a criminal history involving a gun offense (Cook, Pollack, and White, 2018), most respondents reported that it was easier to obtain ammunition than to obtain firearms, although several respondents commented on the need to conserve ammunition. Overall, this research provides some evidence about how criminal markets for firearms and ammunition function, but there exist no reliable estimates of the price elasticity of demand for guns or ammunition by criminal organizations or individuals intending to use firearms for acts of violence (Cook and Pollack, 2017). As research grows in this area and examines underground gun markets across different jurisdictions, researchers may gain a better understanding of whether taxation can serve as an effective measure to prevent criminal acquisition and use of firearms or ammunition.

In contrast to the lack of evidence on how violent or criminal offenders respond to changes in price, there does exist some empirical evidence on how responsive hunters are to such changes. Several articles that exploited variation in hunting license fees have found hunting demand to be relatively unrelated to changes in license fees (Teisl, Boyle, and Record, 1999; Sun, van Kooten, and Voss, 2005; Poudyal, Cho, and Bowker, 2008; Schorr, Lukacs, and Gude, 2014). Although this research suggests that moderate tax increases on guns or ammunition would do little to disrupt hunting or recreational gun use, the evidence is based on changes in hunting license fees (which are a very small fraction of the total cost of hunting) and may not be congruent with the actual response to significant increases in the price of firearms or ammunition.

Understanding the responsiveness of firearm and ammunition demand to changes in price is also key to determining potential government revenues that could result from a tax. The use of these revenues for gun violence prevention efforts serves as another mechanism through which taxation may influence firearm-related death and injury, akin to how gasoline taxes are used to make roads safer for driving. If gun or ammunition tax revenues are used to support the implementation of effective gun violence prevention strategies, taxation could reduce gun deaths and injury even in the absence of changes in demand for firearms. This is one of the stated goals of H.R. 5717, the Gun Violence Prevention and Community Safety Act of 2020, which was introduced in the U.S. House of Representatives in January 2020 but did not receive a vote. The legislation would increase the federal excise tax to 30 percent on firearms and 50 percent on shells and cartridges and proposes partial allocation of tax revenues to support research and interventions focused on gun violence prevention (U.S. House of Representatives, 2020). Researchers currently have little evidence to suggest whether this strategy will be effective in reducing gun deaths and injuries, and effects will depend on the amount of revenue collected and how that revenue is targeted. Seattle’s tax yielded $93,000 in 2017, substantially less than the projected annual revenues of $300,000 to $500,000 (Beekman, 2018).

Conclusions

Overall, researchers currently have little empirical evidence indicating how taxation would influence firearm-related outcomes, such as violent crime or suicides, or establishing how taxing firearms or ammunition would affect firearm prices, the supply of firearms, or defensive gun use. Marginal increases in price associated with hunting licenses offer little evidence to suggest how taxes would influence recreational gun use. Given that taxation has been a standard policy lever for other potentially harmful goods (e.g., cigarettes, alcohol, and soda or sugary beverages), researchers may be able to derive insights from policy changes in these markets, but there are significant differences in making these comparisons (e.g., firearms are durable goods relative to these other products). Furthermore, one needs to consider the varied purposes for which individuals acquire and retain firearms or ammunition and the relationship between various market sources for guns and ammunition. Empirically, understanding the costs and benefits of taxation in gun markets requires exogenous variation in the price of firearms over time or jurisdiction, which requires imposing price regulations in a market for which regulations are already highly contentious.

Originally published March 2, 2018