Policy Documents

Smoke and Borders: How Tax Increases Promote Cross-Border Shopping

J. Scott Moody –
March 6, 2007

Governor John E. Baldacci’s General Fund budget proposal includes a dramatic hike in tobacco taxes. The budget includes a 50
percent increase in the cigarette tax to $3.00 per pack from $2.00 per pack starting in state fiscal year (FY) 2008. Additionally,
the tax on “smokeless tobacco” would increase by 50 percent to 117 percent of the wholesale price from 78 percent, while
“other tobacco” (cigars, pipe tobacco, etc.) would increase by 50 percent to 30 percent of the wholesale price from 20 percent.

Overall, the tobacco tax increase is estimated to generate $66 million in new revenue. However, the new revenue estimate was
clearly made through rose (or is it smoke?) colored glasses. In particular, a reasonable adjustment for the effect of cross-border
shopping reveals a much reduced revenue gain. Cross-border shopping for cigarettes is a nationwide phenomenon and occurs
when there are significant differences in the price of cigarettes between states. Since cigarette taxes affect the price of cigarettes,
differences in the tax rate between states encourage people to buy cigarettes over state lines.