Consumer Response to Cigarette Excise Tax Changes
46 Pages Posted: 17 Oct 2010 Last revised: 24 Jun 2014
Date Written: May 27, 2014
We use a rich dataset of weekly cigarette sales to examine how consumers adapt their behavior before and after excise tax increases --- whether by stockpiling or substituting between quality tiers of a product. We find that stockpiling primarily occurs for low-tier cigarettes. In the short-term, consumers shift from high- to low-tier cigarettes, presumably to maintain current consumption. However, in the long-term, tax increases are associated with substitution towards high-tier cigarettes. In the long-term, average levels of tar, nicotine, and carbon monoxide consumed per pack rises, as consumer substitute across tiers and brands, suggesting a long-term negative impact on health outcomes.
Keywords: Cigarette Taxation, Tax Avoidance, Cross Border Sales, Stockpiling
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