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J Health Econ. 2013 Dec;32(6):1130-41. doi: 10.1016/j.jhealeco.2013.08.005. Epub 2013 Sep 7.

Excise tax avoidance: the case of state cigarette taxes.

Author information

1
NBER & Department of Economics, McMaster University, Hamilton, Ontario, Canada. Electronic address: decicca@mcmaster.ca.

Abstract

We conduct an applied welfare economics analysis of cigarette tax avoidance. We develop an extension of the standard formula for the optimal Pigouvian corrective tax to incorporate the possibility that consumers avoid the tax by making purchases in nearby lower tax jurisdictions. To provide a key parameter for our formula, we estimate a structural endogenous switching regression model of border-crossing and cigarette prices. In illustrative calculations, we find that for many states, after taking into account tax avoidance the optimal tax is at least 20% smaller than the standard Pigouvian tax that simply internalizes external costs. Our empirical estimate that tax avoidance strongly responds to the price differential is the main reason for this result. We also use our results to examine the benefits of replacing avoidable state excise taxes with a harder-to-avoid federal excise tax on cigarettes.

KEYWORDS:

Border-crossing; Cigarette taxes; H2; I18; Smoking

PMID:
24140760
PMCID:
PMC3855906
DOI:
10.1016/j.jhealeco.2013.08.005
[Indexed for MEDLINE]
Free PMC Article

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