New Evidence on the Price Effects of Cigarette Tax Competition

Abstract

Multiple studies have shown that cigarette taxes are more than fully passed through to cigarette prices and that access to a nearby state with a lower cigarette tax also reduces local cigarette prices. We study two other sources of tax competition: nearby Native American reservations and online sales. Using quarterly data on local cigarette prices from 1976 to 2003, we show that the opening of a Native American casino within 25 miles of a city center is associated with a US$0.016–US$0.027 lower per-pack price, while a 50 percentage point increase in Internet penetration is associated with a US$0.22–US$0.25 per-pack price reduction. These effects are not observed for other local prices for which there is no potential tax savings. Our results further our understanding of how tax competition affects local cigarette prices and provide context to studies linking Native American reservations and Internet penetration to cigarette smuggling.