Exploring Border Effects: Sensitivity of Cigarette Consumption to Excise Tax

Aisha Baisalova

CERGE-EI Working Papers from The Center for Economic Research and Graduate Education - Economics Institute, Prague

Abstract: Border effects can have a considerable influence on the effectiveness of excise tax policy measures. The opportunity to buy taxable goods in the nearest lower-tax state redistributes the tax burden among consumers and determines the treatment intensity of how an increase in the tax rate may affect consumption decision. Using Nielsen Consumer Panel data, we estimate the bias arising from border effects and investigate how sensitivity to cigarette excise tax and the size of bias vary for different demographic groups. We find that border effects create a bias in the estimate of consumption sensitivity to an increase in the excise tax rate, which is present for all demographic groups. Tax sensitivity increases with the average distance to the lower tax state border, implying that border residence decreases the impact of excise tax policy interventions on consumer choice.

Keywords: excise taxation; cigarettes; cross-state purchasing; tax avoidance; border effects (search for similar items in EconPapers)
JEL-codes: D12 H26 H71 L66 (search for similar items in EconPapers)
Date: 2022-07
New Economics Papers: this item is included in nep-hea, nep-pbe and nep-pub
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