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Consumer Response to Cigarette Excise Tax Changes

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  • Chiou, Lesley

    (Occidental College)

  • Muehlegger, Eric

    (Harvard University)

Abstract

We use a rich dataset of weekly cigarette sales to examine how consumers adapt their behavior before and after excise tax increases--whether by reducing demand, stockpiling, traveling to low-tax jurisdictions, or substituting towards lower-cost brands. Consumer response varies substantially for different types of cigarettes. Stockpiling primarily occurs for discount cigarettes and is most pronounced at stores far from lower-tax jurisdictions. Border-crossing is greatest at stores close to low-tax jurisdictions and occurs primarily for cigarettes sold by the carton. Finally, we find modest short-run substitution towards lower-cost brands following a tax-increase, consistent with consumers smoothing the transition to higher cigarette taxes. These differences in consumer behavior lead to meaningful differences in tax incidence--pass-through is higher for discount cigarettes which have more inelastic demand. Pass-through is lower near low-tax borders, especially for cigarettes sold by the carton for which cross-border evasion is greatest.

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Bibliographic Info

Paper provided by Harvard University, John F. Kennedy School of Government in its series Working Paper Series with number rwp10-020.

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Date of creation: Jun 2010
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Handle: RePEc:ecl:harjfk:rwp10-020

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  1. Michael F. Lovenheim, 2007. "How Far to the Border?: The Extent and Impact of Cross-Border Casual Cigarette Smuggling," Discussion Papers 06-040, Stanford Institute for Economic Policy Research, revised Oct 2009.
  2. Jérôme Adda & Francesca Cornaglia, 2006. "Taxes, Cigarette Consumption, and Smoking Intensity," American Economic Review, American Economic Association, vol. 96(4), pages 1013-1028, September.
  3. Marion, Justin & Muehlegger, Erich J., 2010. "Fuel Tax Incidence and Supply Conditions," Scholarly Articles 4448995, Harvard Kennedy School of Government.
  4. Jonathan Gruber & Anindya Sen & Mark Stabile, 2002. "Estimating Price Elasticities When there is Smuggling: The Sensitivity of Smoking to Price in Canada," NBER Working Papers 8962, National Bureau of Economic Research, Inc.
  5. Philip DeCicca & Donald Kenkel & Alan Mathios & Yoon-Jeong Shin & Jae-Young Lim, 2008. "Youth smoking, cigarette prices, and anti-smoking sentiment," Health Economics, John Wiley & Sons, Ltd., vol. 17(6), pages 733-749.
  6. Stehr, Mark, 2007. "The Effect of Sunday Sales Bans and Excise Taxes on Drinking and Cross–Border Shopping for Alcoholic Beverages," National Tax Journal, National Tax Association, vol. 60(1), pages 85-105, March.
  7. Keeler, Theodore E. & Hu, Teh-wei & Barnett, Paul G. & Manning, Willard G. & Sung, Hai-Yen, 1996. "Do cigarette producers price-discriminate by state? An empirical analysis of local cigarette pricing and taxation," Journal of Health Economics, Elsevier, vol. 15(4), pages 499-512, August.
  8. Stehr, Mark, 2005. "Cigarette tax avoidance and evasion," Journal of Health Economics, Elsevier, vol. 24(2), pages 277-297, March.
  9. Austan Goolsbee & Michael F. Lovenheim & Joel Slemrod, 2010. "Playing with Fire: Cigarettes, Taxes, and Competition from the Internet," American Economic Journal: Economic Policy, American Economic Association, vol. 2(1), pages 131-54, February.
  10. Donald S. Kenkel, 2005. "Are Alcohol Tax Hikes Fully Passed Through to Prices? Evidence from Alaska," American Economic Review, American Economic Association, vol. 95(2), pages 273-277, May.
  11. Chiou Lesley & Muehlegger Erich, 2008. "Crossing the Line: Direct Estimation of Cross-Border Cigarette Sales and the Effect on Tax Revenue," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 8(1), pages 1-41, December.
  12. Coats, R. Morris, 1995. "A Note on Estimating Cross-Border Effects of State Cigarette Taxes," National Tax Journal, National Tax Association, vol. 48(4), pages 573-84, December.
  13. James Alm & Edward Sennoga & Mark Skidmore, 2009. "Perfect Competition, Urbanization, And Tax Incidence In The Retail Gasoline Market," Economic Inquiry, Western Economic Association International, vol. 47(1), pages 118-134, 01.
  14. Poterba, James M., 1996. "Retail Price Reactions to Changes in State and Local Sales Taxes," National Tax Journal, National Tax Association, vol. 49(2), pages 165-76, June.
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Cited by:
  1. Berardi, N. & Sevestre, P. & Tepaut, M. & Vigneron, A., 2012. "The impact of a `soda tax' on prices. Evidence from French micro data," Working papers 415, Banque de France.

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