Difference in state cigarette excise tax rates: a look into the prominence of tax avoidance behavior

Abstract

I analyze the impact of differences in the cigarette excise tax rates of bordering states on the price elasticity of demand for cigarettes in the home state. Using unique county-level data on the sales tax revenues collected from Kansas tobacco sellers by industry type provided by the Kansas Department of Revenue, as well as data on cigarette excise tax rates, distance to Kansas’ borders, and the combined state and county sales tax rate, I examine the determinants of tobacco sales tax revenue using a fixed effects model. The analysis allows me to infer cigarette demand effects, and I find that the price elasticity of demand for cigarettes in Kansas becomes significantly more elastic closer to a low tax border. Model estimates for gas stations with convenience stores and tobacco retailers suggest that a Kansas cigarette excise tax decrease would result in more sales tax revenue on average for counties within 50 miles of a low tax Kansas border, ceteris paribus.