Addicted to cigarette (sales) : taxing the Native American cigarette trade

In order to close a budget deficit, New York State raised its cigarette tax in 2010 to $4.35 per pack. Included in this legislation was a removal of the exemption of cigarettes sold on Native American Reservations from the tax. This paper develops a model of cigarette demand that focuses on measuring cross-price elasticity of demand in order to ascertain the effect of state-level taxation on the sales of Native American cigarettes in New York. The model indicates that reservations will lose about 79% of their cigarette business, and that New York State will raise about $447 million dollars more each year than they would have if Native American sales remained exempted. The paper also discovers that omitting border-state prices in a cigarette consumption model will create an omitted-variable bias, making the effect of homestate price elasticity appear smaller than it actually is.