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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. 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 .
  2. Gruber, Jonathan & Sen, Anindya & Stabile, Mark, 2003. "Estimating price elasticities when there is smuggling: the sensitivity of smoking to price in Canada," Journal of Health Economics, Elsevier, vol. 22(5), pages 821-842, September.
  3. Lovenheim, Michael F., 2008. "How Far to the Border?: The Extent and Impact of Cross-Border Casual Cigarette Smuggling," National Tax Journal, National Tax Association, vol. 61(1), pages 7-33, March Cit.
  4. 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.
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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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