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Tuesday, April 22, 2008

Lovenheim: The Impact of Cross-Border Cigarette Smuggling on Tax Revenues

Michael F. Lovenheim (Stanford Institute for Economic Policy Research) has published How Far to the Border?: The Extent and Impact of Cross-Border Casual Cigarette Smuggling, 61 Nat'l Tax J. 7 (20080. Here is the abstract:

This paper uses data on cigarette consumption in the Current Population Survey Tobacco Supplements to estimate cigarette demand models that incorporate the decision of whether to smuggle cigarettes across a lower–price border. I find demand elasticities with respect to the home state price are indistinguishable from zero on average and vary significantly with the distance individuals live to a lower–price border. However, when smuggling incentives are eradicated, the price elasticity is negative but still inelastic. I also estimate between 13 and 25% of consumers purchase cigarettes in border localities. The central implication of this study is cross–border smuggling confounds many of the potential health and revenue gains from cigarette taxation.

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