Cigarette taxation: Raising revenues and reducing consumption

Abstract

This paper estimates a dynamic demand model for cigarettes based on panel data from 46 American states over the period 1963 to 1988. The first objective is to show some of the pitfalls of studies that rely on a time series regression of a specific state, or a cross-section regression for a given year. The second objective is to update the results of Baltagi and Levin (1986) from 1980 to 1988 and to study the sensitivity of these results to various ways of modelling the bootlegging effect as well as controlling for fixed or random state effects. This study finds a significant habit persistence effect, a small but significant 'border purchasing' effect, a significant but inelastic own price effect and a small but significant income effect.