Week in Insights: Fireworks Taxes Internalize an Externality

As anyone who’s tried to sleep early on a summer night can sense, fireworks have exploded in popularity in the last few years. Consumer fireworks revenue nearly doubled from 2019 to 2020 and increased 130% from 2019 to 2022.

Alabama, Alaska, Georgia, Indiana, Michigan, Pennsylvania, Texas, and West Virginia either have a separate statewide excise tax on fireworks sales or allow individual localities to impose their own. It’s easy to be cynical and see the taxes as money grabs, but fireworks are an excellent teaching example of using tax policy to internalize an externality.

For instance, I may enjoy setting ...