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Exploring Border Effects: Sensitivity of Cigarette Consumption to Excise Tax

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  • Aisha Baisalova

Abstract

Border effects can have a considerable influence on the effectiveness of excise tax policy measures. The opportunity to buy taxable goods in the nearest lower-tax state redistributes the tax burden among consumers and determines the treatment intensity of how an increase in the tax rate may affect consumption decision. Using Nielsen Consumer Panel data, we estimate the bias arising from border effects and investigate how sensitivity to cigarette excise tax and the size of bias vary for different demographic groups. We find that border effects create a bias in the estimate of consumption sensitivity to an increase in the excise tax rate, which is present for all demographic groups. Tax sensitivity increases with the average distance to the lower tax state border, implying that border residence decreases the impact of excise tax policy interventions on consumer choice.

Suggested Citation

  • Aisha Baisalova, 2022. "Exploring Border Effects: Sensitivity of Cigarette Consumption to Excise Tax," CERGE-EI Working Papers wp726, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    • Handle: RePEc:cer:papers:wp726
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    References listed on IDEAS

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    More about this item

    Keywords

    excise taxation; cigarettes; cross-state purchasing; tax avoidance; border effects;
    All these keywords.

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • 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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