Business and Management INK

Do consumers travel across state lines to avoid taxes?

September 29, 2014 915

cigarette-869762-mExcise tax on cigarettes can vary greatly from state to state. According to the National Conference of State Legislature, state tax amounts in 2011-2012 ranged from the lowest in Missouri at 17 cents per pack and the highest in New York at $4.35 per pack. How does this affect the means by which smokers purchase cigarettes in high tax states? How much tax revenue is lost when smokers seek out alternative purchasing options? Authors Andrew Nicholson, Tracy M. Turner and Eduardo Alvarado discuss in their article “Cigarette Taxes and Cross-border Revenue Effects: Evidence Using Retail Data” from Public Finance Review.

From the article:

This article adds to a growing literature that documents tax avoidance behavior and the implied state tax revenue leakages arising from differential taxation of cigarettes across US states. The ability of consumers to purchase at a lower-tax PFR_72ppiRGB_powerpointprice than that in one’s home state, either through border crossing or through Internet purchases, suggests that requiring Internet cigarette purchases to be subject to taxation and creating interstate coordination of excise tax rates could yield significant gains in the form of higher revenues as well as diminish cigarette consumption. Future research might examine the potential for these gains and the extent to which they are positive even for the states with relatively low excise tax rates, as these states’ retailers also face growing competition from tax-free Internet sales.

Click here to read “Cigarette Taxes and Cross-border Revenue Effects: Evidence Using Retail Data” from Public Finance Review. Want to know about all the latest from Public Finance Review? Click here to sign up for e-alerts!

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