Excise tax avoidance: the case of state cigarette taxes.

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.

journal_name

J Health Econ

authors

DeCicca P,Kenkel D,Liu F

doi

10.1016/j.jhealeco.2013.08.005

subject

Has Abstract

pub_date

2013-12-01 00:00:00

pages

1130-41

issue

6

eissn

0167-6296

issn

1879-1646

pii

S0167-6296(13)00104-5

journal_volume

32

pub_type

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