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How Far to the Border?: The Extent and Impact of Cross-Border Casual Cigarette Smuggling

  • Michael F. Lovenheim

    ()

    (Stanford Institute for Economic Policy Research, Stanford University)

This paper uses micro-data on cigarette consumption from four waves of the CPS Tobacco Supplement to estimate cigarette demand models that incorporate the decision of whether to smuggle cigarettes across a state or Native American Reservation border. I find demand elasticities with respect to the home state price are indistinguishable from zero on average and vary significantly with the distance individuals live to a lower-price border. However, when smuggling incentives are eradicated, the price elasticity is negative, though still inelastic. I also estimate cross-border sales cause a modest increase in consumption, and between 13 and 25 percent of consumers purchase cigarettes in border localities in the CPS sample. The central implication of this study is, while cigarette taxes are ineffective at achieving the goals for which they were levied in many states, there are significant potential gains from price increases that are confounded by cross-border sales.

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Paper provided by Stanford Institute for Economic Policy Research in its series Discussion Papers with number 06-040.

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Date of creation: Aug 2007
Date of revision: Oct 2009
Handle: RePEc:sip:dpaper:06-040
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  1. 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.
  2. Austan Goolsbee & Michael Lovenheim & Joel B. Slemrod, 2009. "Playing With Fire: Cigarettes, Taxes and Competition From the Internet," NBER Working Papers 15612, National Bureau of Economic Research, Inc.
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  9. Gregory J. Colman & Dahlia K. Remler, 2008. "Vertical equity consequences of very high cigarette tax increases: If the poor are the ones smoking, how could cigarette tax increases be progressive?," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 27(2), pages 376-400.
  10. Baltagi, Badi H. & Levin, Dan, 1992. "Cigarette taxation: Raising revenues and reducing consumption," Structural Change and Economic Dynamics, Elsevier, vol. 3(2), pages 321-335, December.
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  13. 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.
  14. Frank J. Chaloupka, 1990. "Rational Addictive Behavior and Cigarette Smoking," NBER Working Papers 3268, National Bureau of Economic Research, Inc.
  15. 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.
  16. Benham, Lee, 1981. "The Effects of Government Regulation on Teenage Smoking: Comment," Journal of Law and Economics, University of Chicago Press, vol. 24(3), pages 571-73, December.
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