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Licensed Unlicensed Requires Authentication Published by De Gruyter December 6, 2008

Crossing the Line: Direct Estimation of Cross-Border Cigarette Sales and the Effect on Tax Revenue

Lesley Chiou and Erich Muehlegger

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.

Published Online: 2008-12-6

©2011 Walter de Gruyter GmbH & Co. KG, Berlin/Boston

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