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Playing With Fire: Cigarettes, Taxes and Competition From the Internet

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  • Austan Goolsbee
  • Michael Lovenheim
  • Joel B. Slemrod

Abstract

This paper documents the rise of the Internet as a source of state-tax-free cigarettes and its impact on taxed sales elasticities. Using data on cigarette tax rates, taxable cigarette sales and individual smoking rates by state from 1980 to 2005 merged with data on Internet penetration, the paper documents that there has been a substantial increase in the sensitivity of taxable cigarette sales to state tax rates that is correlated with the rise of Internet usage within states. The estimates imply that the increased sensitivity from cigarette smuggling over the Internet has lessened the revenue generating potential of cigarette tax increases significantly, although states are still far from the revenue-maximizing tax rates.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15612.

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Date of creation: Dec 2009
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Publication status: published as 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.
Handle: RePEc:nbr:nberwo:15612

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  15. 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.
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Citations

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Cited by:
  1. Avi Goldfarb & Shane Greenstein & Catherine Tucker, 2014. "Introduction to "Economics of Digitization"," NBER Chapters, in: Economics of Digitization National Bureau of Economic Research, Inc.
  2. Andrés Leal & Julio López-Laborda & Fernando Rodrigo, 2010. "Cross-Border Shopping: A Survey," International Advances in Economic Research, Springer, vol. 16(2), pages 135-148, May.
  3. Chiou, Lesley & Muehlegger, Eric, 2010. "Consumer Response to Cigarette Excise Tax Changes," Working Paper Series rwp10-020, Harvard University, John F. Kennedy School of Government.
  4. Philip DeCicca & Donald S. Kenkel & Feng Liu, 2010. "Excise Tax Avoidance: The Case of State Cigarette Taxes," NBER Working Papers 15941, National Bureau of Economic Research, Inc.
  5. Claudio Agostini, 2010. "Tributación a Los Cigarrillos: Análisis y Propuestas," ILADES-Georgetown University Working Papers inv246, Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines.
  6. Liran Einav & Jonathan Levin & Neel Sundaresan, 2012. "Sales Taxes and Internet Commerce," Discussion Papers 11-012, Stanford Institute for Economic Policy Research.
  7. 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.
  8. Edward L. Glaeser, 2012. "Urban Public Finance," NBER Working Papers 18244, National Bureau of Economic Research, Inc.
  9. Hansen, Benjamin & Sabia, Joseph J. & Rees, Daniel I., 2011. "Cigarette Taxes and the Social Market," IZA Discussion Papers 5580, Institute for the Study of Labor (IZA).
  10. Perry Singleton, 2008. "Public Sentiment and Tobacco Control Policy," Center for Policy Research Working Papers 106, Center for Policy Research, Maxwell School, Syracuse University.
  11. Chiou, Lesley & Muehlegger, Erich, 2008. "Crossing the Line: The Effect of Cross Border Cigarette Sales on State Excise Tax Revenues," Working Paper Series rwp08-012, Harvard University, John F. Kennedy School of Government.

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