Internet Diffusion and Implications for Taxation: Evidence from U.S. Cigarette Sales

Abstract

Using state level U.S. data from 1994-2009, this research examines the impact of the Internet on cigarette demand and discusses resulting implications for tax policy. Results show that the Internet increases the demand price elasticity of cigarettes, which limits the ability of governments to generate additional tax revenues through cigarette tax increases. Further, the smuggling of cigarettes, both across domestic and international borders, remains significant, and tobacco producers and Indian casinos undermine efforts to lower cigarette sales.

Keywords: Internet; taxation; cigarettes; smuggling

JEL Classification: D12, L86