In new research, Luis Armona and Adam Rosenberg argue that current state firearm excise taxes inadequately address gun-related crimes. They propose a tax that benefits society by targeting guns responsible for the most homicides, while accommodating the challenging political economy of firearms regulation in the United States.
Firearms are responsible for more than 100,000 injuries and 15,000 homicide fatalities every year in the United States. As of 2018, there were more guns in circulation in the U.S. than people, and since the COVID-19 pandemic, gun ownership has surged to even higher levels. While the vast majority of gun owners are lawful citizens uninvolved in criminal activities, nearly all firearms used in crime were at one point purchased legally. There have been numerous studies linking higher firearm prevalence to increases in homicides, suggesting that the legal firearms market warrants closer regulatory attention.
Federal regulation of the consumer firearms industry largely stagnated in the 20 years following the expiration of the Federal Assault Weapons Ban in 2004. The ban only lasted for ten years and failed to renew. This was in part due to political opposition from participants in the firearm industry and their advocacy organizations, such as the National Rifle Association (NRA) and the industry’s trade organization, the National Shooting Sports Federation (NSSF). Yet, states continue to experiment with firearms regulation, most recently via taxes. California has an 11% excise tax on firearm dealers and manufacturers while Colorado has implemented a 6.5% excise tax. To encourage savings for gun owners, Florida created the most expansive Second Amendment tax holiday in the country, which offers several months of state tax-free firearm sales. These state excise taxes are levied on top of federal excise taxes on the manufacture and importation of firearms—10% for handguns like pistols and 11% for long guns like rifles—with rates that have largely been unchanged since their introduction during World War I.
At the same time, we know surprisingly little about how these markets operate, including how consumers make choices between the thousands of firearms available to them, how much they value these weapons, and how suppliers set prices or react to taxes. Without this information, it is impossible to know whether a tax of, say, 50%, 10%, or 0% is the “right level” to raise federal funds and reduce gun-related crimes, or what the effects of these taxes would be. Moreover, the recent introduction of state-level firearm taxes have emerged in politically favorable environments, which likely do not reflect the political landscape facing efforts to address the gun violence epidemic at the federal level.
In our study, we build and estimate an equilibrium model of the legal firearm market in the U.S., allowing us to fill in these knowledge gaps. Our empirical approach leverages detailed transaction-level data from Massachusetts—one of the few states that records individual firearm purchases—which we combine with nationwide data on overall firearm purchasing and industry pricing.
In addition to taxes, gun buyers already experience an additional cost stemming from high concentration in the legal firearms market. Manufacturers produce the typical firearm for around $300, but their market power enables them to set prices more than twice as high, at around $700 for the typical firearm. By pricing firearms above cost, manufacturers generate around $3 billion of profits per year. Consumer surplus at these prices, or the value that consumers derive from the opportunity to buy guns, is $29 billion per year, around 10% of the value that American consumers enjoyed from the automobile industry.
In the context of firearms, market power is a double-edged sword. Typically, the magnitude of markups charged by suppliers are considered damaging for society, leading to inefficiently high prices that lower consumer surplus and result in inefficiently low transaction quantities. Yet, as firearm prevalence is also associated with increases in homicides, these markups chosen by gun suppliers operate similarly to a corrective tax, raising the prices and lowering the quantities of a socially damaging good.
In our study, we find that the prices chosen by firearm manufacturers do not align with this goal, and that a simple redesign of the federal firearm tax towards deadlier weapons would prevent dozens of shootings each year, leave market surplus intact, and shift surplus towards politically conservative areas.
Firearms differ in their customer base and cause vastly different harms
Handguns and long guns serve different consumers and we find that gun buyers do not readily substitute between these types of weapons. While handguns are overwhelmingly bought for personal protection, long guns are more likely to be purchased for recreational activities, such as sport shooting and hunting. These differences in use lead to stark differences in demand for gun types across the country: long guns are more likely to be purchased by those living in rural, politically conservative neighborhoods, while handguns are more likely to be purchased by those living in urban, more racially diverse areas.
These firearm types also differentially affect crime, as handguns make up only 60% of firearm purchases, but account for 90% of firearm violence. We find that the purchase of every 10,000 long guns would cause approximately 1.3 additional firearm homicides over their usable lifespan, while the purchase of 10,000 handguns would cause around 23.9 homicides over the same span. Discounting these costs back to the present day and applying a typical statistical value of a life, the average purchase of a long gun generates around $200 in expected harm from homicides, while the harm from a handgun is $5,000, 25 times higher.
These facts point to inefficiencies in the firearm market and space for more effective firearm policy. While overall firearm prices are already high due to market power, prices are not related to the social harm caused by each type of weapon (i.e., markups are high on both handguns and long guns). Consequently, market forces alone are insufficient to efficiently address the public health implications of the firearm market. Regulation that accounts for firearm harms should disproportionately raise the price of handguns.
Reformulating firearms taxes can reduce violence without harming gun owners
Using our estimated model of the firearm market, we simulate alternative tax regimes to replace the 10% federal excise tax for handguns and 11% for long guns that is currently in place for all new gun purchases. We first consider scaling up California’s new firearm sales tax, finding that approximately doubling the federal rate on all firearms to 21% would produce meaningful gains to society through a reduction in violence. Yet, these gains would come at a significant cost to both sides of the firearm market, totaling about $1.2 billion per year in lost consumer surplus and industry profits. Moreover, this blunt, double-the-tax regulation would disproportionately harm consumers in conservative neighborhoods. Given the partisan nature of the firearm regulation, with advocacy groups such as the NRA and NSSF maintaining a strong presence in Washington, partisan gridlock would likely make such a policy infeasible to implement.
With this in mind, we instead consider an alternative reformulation of the federal excise tax, that aims to reduce firearm-related violence as much as possible, while also minimizing harm to firearm consumers. Given the large differences in violent crime between handguns and long guns, a natural tax scheme is to raise taxes on handguns only, while simultaneously reducing taxes on long guns to alleviate harm to consumers. We find that zeroing-out the tax on long guns while increasing the handgun tax to 15.5% would considerably reduce firearm violence, achieving two-thirds of the homicide reduction that doubling the existing tax would generate, while simultaneously causing no harm to gun buyers or manufacturers on aggregate.
Moreover, individuals in Republican-leaning states and neighborhoods with high NRA presence, where the typical consumer is more likely to buy long guns, would actually enjoy higher consumer surplus under this policy redesign.
Taken together, our study suggests that the century-old federal excise tax structure on firearms is poorly suited to the public health problems it could help address. A “tilt” of the existing tax towards higher rates on handguns has the potential to meaningfully reduce homicides, while accommodating individuals in political factions that may otherwise oppose changes to firearm regulation.
Author’s Disclosure: The author reports no conflicts of interest. You can read our disclosure policy here.
Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.
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