Cigarette Taxes and Cross-border Revenue Effects

Abstract

Episodes of large tax differentials between neighboring states create an incentive for cigarette tax avoidance by border crossing. We use unique quarterly panel data at the county level for the state of Kansas on cigarette retailers' sales tax remittances by distance to a state border to gauge the extent of smuggling activity and revenue effects of increases in cigarette excise tax rates. For quantities sold near an urban, low-tax border, we find sizable effects of higher excise tax rates on sales and cigarette excise tax revenues. Implications for cross-border state revenue leakages are discussed.

Relative Tax Rates, Proximity, and Cigarette Tax Noncompliance: Evidence from a National Sample of Littered Cigarette Packs

“…Second, our study illustrates why policies that promote cigarette tax harmonization or programs to track and trace cigarettes packs from point of production to the point of sale may be effective means to discourage tax evasion and to promote public health. We present new evidence, consistent with earlier studies (Colman and Remler 2008;Maclean, Webber, and Marti 2014;Nicholson, Turner, and Alvarado 2016;Tauras 2005), that shows that cross-region tax differentials are strongly associated with tax avoidance and evasion. We document the magnitude of this association and quantify the interaction between tax differentials and distance.…”

“…Without knowing the location of purchase, the tax that is paid often cannot be inferred. The best solution available sometimes has been, as in Lovenheim (2008), to theorize, based on relatively abstract models about human behavior and to use econometric evidence to simultaneously infer both the propensity for tax noncompliance and the price elasticity of demand for cigarettes (see also Nicholson, Turner, and Alvarado 2016). Without empirical grounding for tax noncompliance estimates, however, estimates of the price elasticity of demand for cigarettes are likely to be biased since econometricians cannot be certain of the saliency of home and cross-border prices (Pesko et al 2016).…”

Do Local Tobacco-21 Laws Reduce Smoking Among 18 to 20 Year-Olds?

“…[5] However, these results cannot be directly compared to that model, as the latter is based on hypothesized initiation effects (i.e., having smoked at least 100 cigarettes), not current An array of research indicates that consumers circumvent local tobacco policies by crossing borders to buy cigarettes in lower tax areas. [19,20,21,22,23] While such policy avoidance would be expected to reduce tobacco-21 restrictions' efficacy, this study finds a substantive population in that age-group. [24,25] Thus, with local tobacco-21 policies offering a means to reduce smoking among 18 to 20 year-olds, state preemption laws stand in the way of potential health gains.…”

The Economics of Tobacco Regulation: A Comprehensive Review

“…Lovenheim's estimate increases substantially -to 25% -when he includes Native American reservations. This method of measuring and accounting for cross-border purchasing behavior has been used repeatedly by researchers and forms a large part of this literature(Beatty, Larsen, and Sommervoll 2009;Lakhdar, Vaillant and Wolff 2016;Nicholson, Turner, and Alvarado 2016;…”