Tax Evasion and Illicit Cigarettes in California: Part II – Smokers’ Intended Responses to a Tax Increase

Abstract

We examine recent survey data from California to investigate smokers’ intended responses to an increase in cigarette excise taxes rates, including tax avoidance and the economic crimes of tax evasion and illicit trade in tobacco products (ITTP). We estimate how tax avoidance, tax evasion, and ITTP might change in response to a recent tax increase. We examine how such intended behaviors vary across demographic groups and how they are related to factors pertaining to the cost of engaging in ITTP. Half of smokers intend to act in ways that undermine, at least partially, the public health rationale for raising tobacco taxes. On the other hand, 73.5% intend to reduce their nicotine use or substitute the use of less harmful delivery systems for cigarette smoking.

Keywords: tax evasion, tax avoidance, ITTP, illicit trade, black markets, excise taxation, tobacco, counterfeits

JEL Classification: H26, I18, K42