Crossing the line: Direct estimation of cross-border cigarette sales and the effect on tax revenue

Listed in:

• Determinants of illicit trade
• ... on tax revenue
• Impact of tobacco taxation
• Illicit trade

Abstract

Differences in excise taxes across jurisdictions create incentives for consumers to cross the border and to purchase in lower-tax jurisdictions. This paper introduces a discrete choice model to examine tax avoidance and state border crossing in the market for cigarettes. We exploit a rich dataset of consumer location choices and demographics to estimate a consumer's tradeoff between distance and price when choosing a location to maximize utility. Using the estimates from our location and demand models, we reconsider a recent public policy issue among states and simulate tax avoidance under alternative cigarette excise tax levels.