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

  • Austan Goolsbee
  • Michael F. Lovenheim
  • Joel Slemrod

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)

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/pol.2.1.131
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File URL: http://www.aeaweb.org/aej/pol/data/2007-0030_data.zip
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Article provided by American Economic Association in its journal American Economic Journal: Economic Policy.

Volume (Year): 2 (2010)
Issue (Month): 1 (February)
Pages: 131-54

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Handle: RePEc:aea:aejpol:v:2:y:2010:i:1:p:131-54
Note: DOI: 10.1257/pol.2.1.131
Contact details of provider: Web page: https://www.aeaweb.org/aej-policy
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  1. Raj Chetty & Adam Looney & Kory Kroft, 2007. "Salience and Taxation: Theory and Evidence," NBER Working Papers 13330, National Bureau of Economic Research, Inc.
  2. Matthew C. Farrelly & Terry F. Pechacek & Frank J. Chaloupka, 2001. "The Impact of Tobacco Control Program Expenditures on Aggregate Cigarette Sales: 1981-1998," NBER Working Papers 8691, National Bureau of Economic Research, Inc.
  3. Ayda A. Yurekli & Ping Zhang, 2000. "The impact of clean indoor-air laws and cigarette smuggling on demand for cigarettes: an empirical model," Health Economics, John Wiley & Sons, Ltd., vol. 9(2), pages 159-170.
  4. Gary S. Becker & Michael Grossman & Kevin M. Murphy, 1990. "An Empirical Analysis of Cigarette Addiction," University of Chicago - George G. Stigler Center for Study of Economy and State 61, Chicago - Center for Study of Economy and State.
  5. 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.
  6. Keeler, Theodore E. & Hu, Teh-wei & Manning, Willard G. & Sung, Hai-Yen, 2001. "State Tobacco Taxation, Education and Smoking: Controlling for the Effects of Omitted Variables," National Tax Journal, National Tax Association, vol. 54(n. 1), pages 83-102, March.
  7. 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.
  8. Joel Slemrod & Wojciech Kopczuk, 2000. "The Optimal Elasticity of Taxable Income," NBER Working Papers 7922, National Bureau of Economic Research, Inc.
  9. Jonathan Gruber, 2000. "Youth Smoking in the U.S.: Prices and Policies," NBER Working Papers 7506, National Bureau of Economic Research, Inc.
  10. Stehr, Mark, 2005. "Cigarette tax avoidance and evasion," Journal of Health Economics, Elsevier, vol. 24(2), pages 277-297, March.
  11. Brown, Jeffrey, 2000. "Does the Internet Make Markets More Competitive? Evidence from the Life Insurance Industry," Working Paper Series rwp00-007, Harvard University, John F. Kennedy School of Government.
  12. Jonathan Gruber & Botond Köszegi, 2001. "Is Addiction "Rational"? Theory and Evidence," The Quarterly Journal of Economics, Oxford University Press, vol. 116(4), pages 1261-1303.
  13. Thursby, Jerry G. & Thursby, Marie C., 2000. "Interstate Cigarette Bootlegging: Extent, Revenue Losses, and Effects of Federal Intervention," National Tax Journal, National Tax Association, vol. 53(n. 1), pages 59-78, March.
  14. Chaloupka, Frank J. & Warner, Kenneth E., 2000. "The economics of smoking," Handbook of Health Economics, in: A. J. Culyer & J. P. Newhouse (ed.), Handbook of Health Economics, edition 1, volume 1, chapter 29, pages 1539-1627 Elsevier.
  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.
  16. Farrelly, Matthew C. & Pechacek, Terry F. & Chaloupka, Frank J., 2003. "The impact of tobacco control program expenditures on aggregate cigarette sales: 1981-2000," Journal of Health Economics, Elsevier, vol. 22(5), pages 843-859, September.
  17. William N. Evans & Jeanne S. Ringel & Diana Stech, 1999. "Tobacco Taxes and Public Policy to Discourage Smoking," NBER Chapters, in: Tax Policy and the Economy, Volume 13, pages 1-56 National Bureau of Economic Research, Inc.
  18. Hu, Teh-Wei & Sung, Hai-Yen & Keeler, Theodore E, 1995. "The State Antismoking Campaign and the Industry Response: The Effects of Advertising on Cigarette Consumption in California," American Economic Review, American Economic Association, vol. 85(2), pages 85-90, May.
  19. 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.
  20. Marie C. Thursby & Jerry G. Thursby, 1994. "Interstate Cigarette Bootlegging: Extent, Revenue Losses, and Effects of Government Intervention," NBER Working Papers 4763, National Bureau of Economic Research, Inc.
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