Working Paper: NBER ID: w15612
Authors: Austan Goolsbee; Michael Lovenheim; Joel B. Slemrod
Abstract: This paper documents the rise of the Internet as a source of state-tax-free cigarettes and its impact on taxed sales elasticities. Using data on cigarette tax rates, taxable cigarette sales and individual smoking rates by state from 1980 to 2005 merged with data on Internet penetration, the paper documents that there has been a substantial increase in the sensitivity of taxable cigarette sales to state tax rates that is correlated with the rise of Internet usage within states. The estimates imply that the increased sensitivity from cigarette smuggling over the Internet has lessened the revenue generating potential of cigarette tax increases significantly, although states are still far from the revenue-maximizing tax rates.
Keywords: Cigarette Taxes; Internet Sales; Tax Elasticity; Tax Evasion; Public Health
JEL Codes: H2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| tax increases from 2001 to 2005 (H22) | approximately 9 percent less revenue than expected (H27) |
| internet penetration (L96) | increased sensitivity of taxable cigarette sales to state tax rates (H71) |
| internet penetration + tax rates (H29) | increased tax sensitivity of cigarette sales (H23) |
| internet smuggling (K24) | greater tax rate elasticity of taxable sales (H30) |