The Heterogeneous Geographic and Socioeconomic Incidence of Cigarette Taxes: Evidence from Nielsen Homescan Data

This paper uses Nielsen Homescan data at the Universal Product Code-transaction level to identify how cigarette taxes are passed through to consumer prices in order to determine how the supply and demand-side split the excess burden of taxation. We find that these excise taxes are less than fully passed through to consumer prices. Using information on consumer location and the location of purchases, we show that the availability of lower-tax goods across uncontrolled borders creates significant differences in how consumer prices are affected by excise taxes. Close to lower-tax borders, about half of the cigarette tax is passed on to consumers through higher prices. Far from these borders, however, consumer prices are much more responsive to excise taxes. We also demonstrate that tax evasion opportunities have a sizable effect on purchasing behavior by altering consumer search, prices paid and quantities purchased. With the household demographic information contained in our data, we show that the incidence of cigarette taxes and the border effect varies across household income and education groups. These findings have important consequences for the distribution of the excess burden of cigarette taxes and thus for the social welfare costs and benefits of these taxes.