NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Excise Tax Avoidance: The Case of State Cigarette Taxes

Philip DeCicca, Donald S. Kenkel, Feng Liu

NBER Working Paper No. 15941
Issued in April 2010
NBER Program(s):   HE

In this paper we contribute new empirical results about consumers’ decisions to avoid cigarette excise taxes, and a new applied welfare economic analysis of optimal excise taxation with tax avoidance. We examine direct measures of consumer excise tax avoidance in novel individual-level data from the 2003 and 2006 - 2007 Tobacco Use Supplements to the U.S. Current Population Survey. We estimate reduced-form models and a structural endogenous switching regression model. In the structural border-crossing equation, the decision to cross the border depends on the difference between the endogenous home- and border-state prices. The reduced-form and structural results show that the probability of cross-border cigarette purchases responds in predictable ways to the economic incentives created by the distance to the border and state tax differentials. To our knowledge, we are also the first study to extend the formula for optimal Pigouvian corrective taxation to incorporate excise tax avoidance. Taking into account tax avoidance implies the optimal tax is substantially below the simple Pigouvian tax that internalizes external costs. In illustrative calculations for 2003, we find that in 20 states the optimal tax that accounts for tax avoidance is at least 20 percent smaller than the simple Pigouvian tax.

download in pdf format
   (231 K)

email paper

The NBER Bulletin on Aging and Health provides summaries of publications like this.  You can sign up to receive the NBER Bulletin on Aging and Health by email.

This paper is available as PDF (231 K) or via email.

Acknowledgments

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w15941

Published: DeCicca, Philip & Kenkel, Donald & Liu, Feng, 2013. "Excise tax avoidance: The case of state cigarette taxes," Journal of Health Economics, Elsevier, vol. 32(6), pages 1130-1141.

Users who downloaded this paper also downloaded these:
Chaloupka, Peck, Tauras, Xu, and Yurekli w16287 Cigarette Excise Taxation: The Impact of Tax Structure on Prices, Revenues, and Cigarette Smoking
DeCicca, Kenkel, and Liu w15942 Who Pays Cigarette Taxes? The Impact of Consumer Price Search
Gruber and Koszegi w8777 A Theory of Government Regulation of Addictive Bads: Optimal Tax Levels and Tax Incidence for Cigarette Excise Taxation
Stiglitz w1868 The General Theory of Tax Avoidance
Slemrod and Yitzhaki w7473 Tax Avoidance, Evasion, and Administration
 
Publications
Activities
Meetings
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us