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Playing with Fire: Cigarettes, Taxes, and Competition from the Internet

Author

Listed:
  • Austan Goolsbee
  • Michael F. Lovenheim
  • Joel 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, this 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. (JEL D12, H25, H31, H71, L66)

Suggested Citation

  • 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 131-154, February.
  • Handle: RePEc:aea:aejpol:v:2:y:2010:i:1:p:131-54 Note: DOI: 10.1257/pol.2.1.131
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    References listed on IDEAS

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    Cited by:

    1. 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.
    2. Harding, Matthew & Lovenheim, Michael, 2017. "The effect of prices on nutrition: Comparing the impact of product- and nutrient-specific taxes," Journal of Health Economics, Elsevier, pages 53-71.
    3. Ishuan Li & Robert Simonson & Guncha Babajanova & Matthew Tuomala, 2016. "Smartphone Diffusion and Consumer Price Comparison Shopping Behavior: Implications for the Marketplace Fairness Act," Economics Bulletin, AccessEcon, vol. 36(3), pages 1337-1353.
    4. Liran Einav & Dan Knoepfle & Jonathan Levin & Neel Sundaresan, 2014. "Sales Taxes and Internet Commerce," American Economic Review, American Economic Association, pages 1-26.
    5. Kyle Rozema & Nicolas Ziebarth, 2015. "Behavioral Responses to Taxation: Cigarette Taxes and Food Stamp Take-Up," Working Papers 150015, Canadian Centre for Health Economics.
    6. Avi Goldfarb & Shane M. Greenstein & Catherine E. Tucker, 2015. "Introduction to "Economic Analysis of the Digital Economy"," NBER Chapters,in: Economic Analysis of the Digital Economy, pages 1-17 National Bureau of Economic Research, Inc.
    7. 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.
    8. 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).
    9. Christian Ben Lakhdar & Nicolas Gérard Vaillant & François-Charles Wolff, 2016. "Does smoke cross the border? Cigarette tax avoidance in France," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 17(9), pages 1073-1089, December.
    10. DeCicca, Philip & Kenkel, Donald & Liu, Feng, 2013. "Excise tax avoidance: The case of state cigarette taxes," Journal of Health Economics, Elsevier, vol. 32(6), pages 1130-1141.
    11. Benjamin Hansen & Daniel I. Rees & Joseph J. Sabia, 2013. "Cigarette Taxes and How Youths Obtain Cigarettes," National Tax Journal, National Tax Association, vol. 66(2), pages 371-394, June.
    12. 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, pages 1-41.
    13. repec:kap:iaecre:v:16:y:2010:i:2:p:135-148 is not listed on IDEAS
    14. repec:eee:pubeco:v:150:y:2017:i:c:p:53-74 is not listed on IDEAS
    15. Jean-François Houde & Peter Newberry & Katja Seim, 2017. "Economies of Density in E-Commerce: A Study of Amazon’s Fulfillment Center Network," NBER Working Papers 23361, National Bureau of Economic Research, Inc.
    16. Edward L. Glaeser, 2012. "Urban Public Finance," NBER Working Papers 18244, National Bureau of Economic Research, Inc.
    17. Perry Singleton, 2008. "Public Sentiment and Tobacco Control Policy," Center for Policy Research Working Papers 106, Center for Policy Research, Maxwell School, Syracuse University.
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    19. 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.
    20. Andrés Leal & Julio López-Laborda & Fernando Rodrigo, 2010. "Cross-Border Shopping: A Survey," International Advances in Economic Research, Springer;International Atlantic Economic Society, pages 135-148.

    More about this item

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
    • L66 - Industrial Organization - - Industry Studies: Manufacturing - - - Food; Beverages; Cosmetics; Tobacco

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    1. Playing with Fire: Cigarettes, Taxes, and Competition from the Internet (AEJ:EP 2010) in ReplicationWiki

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