Tax Evasion and Illicit Cigarettes in California: Part I – Survey Evidence on Current Behavior

Abstract

Data from a novel online survey of 5,000 English-speaking adult cigarette smokers in California in advance of a recent increase in the state’s cigarette excise tax indicate that slightly more than one-quarter of that population engaged in some legal tax-avoiding behavior in the previous month, while nearly one-fifth illegally evaded taxes. (The two behaviors overlapped substantially.) Candor-inducing indirect questioning via the item count technique substantially increased those figures. Smokers who roll their own cigarettes, e-cigarette users, younger smokers, and those with more income and education are all more likely to engage in at least some of the suspect market behaviors examined. There is a much lower incidence of counterfeit product and sales of single cigarettes. This suggests that the tax increase may lead to significant amounts of adaptive behavior by smokers that will tend to reduce the intended health benefits of that policy change.

Keywords: tax evasion, tax avoidance, ITTP, illicit trade, black markets, shadow economy, tobacco, excise taxes

JEL Classification: H26, I18, K42