How Far to the Border?: The Extent and Impact of Cross-Border Casual Cigarette Smuggling

Abstract

This paper uses micro-data on cigarette consumption from four waves of the CPS Tobacco Supplement to estimate cigarette demand models that incorporate the decision of whether to smuggle cigarettes across a state or Native American Reservation 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, though still inelastic. I also estimate cross-border sales cause a modest increase in consumption, and between 13 and 25 percent of consumers purchase cigarettes in border localities in the CPS sample. The central implication of this study is, while cigarette taxes are ineffective at achieving the goals for which they were levied in many states, there are significant potential gains from price increases that are confounded by cross-border sales.

Cross-Border Commuting and Consuming: An Empirical Investigation

“…In particular, cross-border shopping of tobacco has been analysed extensively in the U.S. in the context of casual smuggling across state and province borders and to the concern of fiscal authorities. Examples of this research are Coats (1995), Thursby, Jensen and Thursby (1991), Thursby and Thursby (2000), Chiou and Muehlegger (2008) or Lovenheim (2008). The latter for example reports 13-25% of cigarettes to be purchased in a lower-price state or Native American Reservation.…”

A New Form of Federal or State-level Cigarette Excise Taxation in the U.S.

“…If some states were to resist raising cigarette excise taxes in the form of the proposed/agreed-upon SSET or were to resist raising the cigarette excise tax in the same way and to the same extent, due either to the influence of tobacco producers, tobacco lobbyists, and/or tobacco growers organizations and/or due to some other reason, whereas other states raised cigarette taxation by fully adopting the same SSET, the revenue and other benefits for the policy would be less extensive, particularly in those cases where cigarette purchases could be made on a large scale across state lines without significant transaction costs (Lovenheim, 2008). Interestingly, on this very issue, Lovenheim (2008, p. 7) estimates that 13-25 percent of consumers already purchase cigarettes in border localities.…”

The Impact of Cigarette Tax Reduction on Consumption Behavior: Short-And Long-Term Empirical Evidence from Canada

“…Finally, most literature has left out the fact that, as taxes increase, consumers may turn to smuggled products and contraband (Saba et al, 1995;Duffy, 2006). To address this concern, most research that has directly taken into account this displacement of demand toward illegal offerings has suggested levying federal excise taxes instead of state-level taxes, preventing illegal smuggling from one region to another within the country (Barnett et al, 1995;Lovenheim, 2008;Beatty, Larsen et al, 2009), a conclusion also prevalent in the context of other products subjected to sin-taxes such as alcohol (Levy and Sheflin, 1985).…”