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Faculty Research Working Paper Series
Erich J. Muehlegger
Associate Professor of Public Policy
Consumer Response to Cigarette Excise Tax Changes
Chiou, Lesley and Erich J. Muehlegger. "Consumer Response to Cigarette Excise Tax Changes." HKS Faculty Research Working Paper Series RWP10-020, June 2010.
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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