Cross-border tobacco prices and cigarette excise taxes

There is consensus that increasing cigarette excise tax (and price) is an important way to discourage smoking. While there have been significant increases in excise taxes, there is great variation between states. When advocates seek to increase state excise taxes, opposition comes from retailers claiming that it will hurt business. Kentucky has historically had a very low cigarette tax and has “enjoyed” substantial sales from people coming from states with higher taxes. This project analyzes cigarette excise taxes and retail prices in states bordering Kentucky in comparison to in-state tax and price. A uniform set of cigarette brands were selected and then price comparisons were done in communities across Kentucky's border in surrounding states. Data were collected in 2005; price sampling was done in 21 pairs of communities on opposite sides of the border, in 117 retail stores. Findings were that tax disparities were not proportional to price disparities. For example, while the tax in Kentucky was $0.03 per pack compared to $0.20 in Tennessee, the retail price in Tennessee was only $0.03 higher. Other findings will be discussed. The conclusion is that retailers, distributors, and manufacturers establish prices in response to many factors, not just excise taxes. They can blunt the impact of tax changes to prop up sales. This is bad news to advocates: increasing the tax may have less impact than anticipated, but also good news: claims of opposition forces regarding business closings and employment losses may be refuted, based on these findings.