Document Type

Article

Publication Date

1-22-2019

Abstract

Illicit trade in tobacco products (ITTP) creates many harms including reduced tax revenues; damages to the economic interests of legitimate actors; funding for organized-crime and terrorist groups; negative effects of participation in illicit markets, such as violence and incarceration; and reduced effectiveness of smoking-reduction policies, leading to increased damage to health. To study the prevalence of tax avoidance and ITTP, we analyze a large, novel set of data from empty discarded pack (EDP) studies. In EDP studies, teams of researchers collect all cigarette packs discarded in publicly accessible spaces of selected neighborhoods. Packs are examined for the absence of local tax stamps, signs of non-authentic packaging or stamps, and other indications of potential tax evasion or counterfeit product. We describe the data and analyze the prevalence of ITTP in three California metropolitan areas. Data from 2011 to 2015 are available, yielding 32,000 observations. Each observation includes dozens of variables covering the brand, location to the ZIP code level, tax status, counterfeit status, and other information about the pack. There is modest evidence of tax avoidance (up to 19.8% of packs in San Diego) and illicit trade (no more than 10% in Los Angeles, 17% in San Francisco, or 20% in San Diego under the broadest assumptions), which includes bootlegging, counterfeits, cigarettes produced for illicit-market sales, and cigarettes without any tax stamps. California increased its excise tax on cigarettes by $2 per pack (to $2.87) on April 1, 2017; these data will inform future studies of the effect of this increase on ITTP.

In our econometric investigation, we explore the determinants of ITTP. Prices in other states matter a lot: A dollar increase per hour of driving time in the price differential with other states is associated with a 36 to 49 percentage point higher probability that tax was not paid for a pack. Tax avoidance also rises with the proximity of licensed cigarette retailers (at least where they are most common). Other parts of the variation in ITTP are due to the differing demographic makeup of the areas. Income, at least in some ranges, was found to have a negative impact on tax avoidance. The fraction of the population that is Black has a negative effect on tax avoidance, compared to the omitted race/ethnicity category of Whites. The median age of the area has an inverted U-shaped impact on avoidance.

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