Consumer Response to Cigarette Excise Tax Changes
AbstractWe 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 InfoPaper provided by Harvard University, John F. Kennedy School of Government in its series Working Paper Series with number rwp10-020.
Date of creation: Jun 2010
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Other versions of this item:
- D10 - Microeconomics - - Household Behavior - - - General
- D40 - Microeconomics - - Market Structure and Pricing - - - General
- H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
- H70 - Public Economics - - State and Local Government; Intergovernmental Relations - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-03-12 (All new papers)
- NEP-HEA-2011-03-12 (Health Economics)
- NEP-MKT-2011-03-12 (Marketing)
- NEP-PBE-2011-03-12 (Public Economics)
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