Consumer Response to Cigarette Excise Tax Changes

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Consumer Response to Cigarette Excise Tax Changes

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Title: Consumer Response to Cigarette Excise Tax Changes
Author: Chiou, Lesley; Muehlegger, Erich J.

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Citation: Chiou, Lesley and Erich J. Muehlegger. 2010. Consumer Response to Cigarette Excise Tax Changes. HKS Faculty Research Working Paper Series, RWP10-020, John F. Kennedy School of Government, Harvard University.
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Abstract: We use a rich dataset of weekly cigarette sales to examine how consumers adapt their behavior before and after excise tax increases - whether by reducing demand, stockpiling, traveling to low-tax jurisdictions, or substituting towards lower-cost brands. Consumer response varies substantially for different types of cigarettes. Stockpiling primarily occurs for discount cigarettes and is most pronounced at stores far from lower-tax jurisdictions. Border-crossing is greatest at stores close to low-tax jurisdictions and occurs primarily for cigarettes sold by the carton. Finally, we find modest short-run substitution towards lower-cost brands following a tax-increase, consistent with consumers smoothing the transition to higher cigarette taxes. These differences in consumer behavior lead to meaningful differences in tax incidence - pass-through is higher for discount cigarettes which have more inelastic demand. Pass-through is lower near low-tax borders, especially for cigarettes sold by the carton for which cross-border evasion is greatest.
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