1. Methodology
We first seek to investigate whether the level and tax responsiveness of a state’s taxed cigarette sales are related to the extent of Internet use in that state (denoted with a subscript s below) in a given year (denoted with a subscript t). We regress the logarithm of per-capita taxed cigarette packs against the log of the real tax-inclusive price of cigarettes in the state and a measure of neighboring states’ tax-inclusive prices. Then, we add the state’s log tax-inclusive price interacted with a measure of Internet usage, and the level of Internet usage by itself. The basic specification is
(1)
where q is the quantity of taxed cigarette packs sold per capita in a given state and year, P is the pre-tax price, tax is the state tax rate (excise plus sales), I is a measure of Internet usage in the state (discussed below), and Y is real personal income per capita in the state. The neighboring states’ are simple averages of all contiguous states’ values. Because we do not expect to be able to explain all of the cross-state and cross-time variation in taxed sales due to non-tax factors, we also include dummy variables for each state and each year. With both state and year dummy variables included, we are seeking to explain the year-to-year changes in a state’s per capita taxed sales relative to the average year-to-year changes, as a function of the state’s year-to-year changes in the real retail price including the state excise tax. In particular we seek evidence as to whether the tax sensitivity has increased most in states where Internet usage has grown the fastest. We will also present results where we allow the baseline price elasticity to vary across states or across time.
2. Data
Although we do not have any direct measures of how much people use the Internet to make or research online cigarette purchases, we will use information about the share of people in a state that use the Internet as a proxy, implicitly assuming that use of Internet cigarette sites is proportional to other measures of Internet use. Our primary data source will be the computer supplements to the Current Population Survey that ask about computer usage in 1994, 1997, 1998, 2000, and 2001. The survey question we use is whether the respondent uses the Internet. Unfortunately, the CPS wording changes from year to year. The 2001 estimates, for example, report Internet use from any location, whereas in the 2000 and 1998, they report Internet use at home and outside the home separately and in 1997 home, work, and school separately. For 1997, 1998, and 2000 we define an individual as an Internet user if they respond yes to any of these questions. The 1994 version of the survey does not contain any questions related to the Internet, but did ask whether they had a computer with a modem. This was repeated in 1997 so we multiply the share of modem users in 1994 by the share of modem users in 1997 that had Internet access (58 percent).
We will also use data from a large consumer survey conducted by Forrester Research, Inc. as part of the Technographics 2002 program. The survey asked some 80,000 people about their demographics (including whether they smoke) along with questions about whether they use the Internet at all, whether they have ever bought something online, and their past history of Internet usage. The data is meant to be nationally representative; more details can be found in Yonish et al. (2001) or Goolsbee (2000). Using the data on how long each person has been online, we are able to create a measure of the share of each state’s population that was online in a given year from 1995 to the present following the method of Goolsbee and Brown (2002). For years before 1995, we set all the Internet use measures to zero. We will use the share of the state population that had online access in the year as our measure. The survey data would also allow us to compute alternative measures such as share of people in the state that have bought something online, the share that smoke and have Internet access, the share that smoke and have bought online, and the share of smokers in the state that are online. Varying the measure of Internet access, though, made little difference to the results so we have left these alternative measures out to save space.
The data on taxed cigarette sales, excise taxes, and the retail prices of cigarettes span 1980 to 2001, and are taken from The Tax Burden on Tobacco, published by The Tobacco Institute until 1998 and updated by Orzechowski and Walker (2001). The tax rate is the weighted average over the fiscal year. Since the price is only reported at a point in time (November 1 of the year) we impute an estimate for the weighted average price over the fiscal year, although our results were very similar just using the point-in-time measure instead. Because of our concern that the pre-tax price might be endogenous to the state excise tax rate, we use the tax rate alone as an instrument for the tax-inclusive price, p+t.
When we examine the actual consumption of cigarettes in the states in response to tax changes, we analyze data for 1990 to 2000 from the Center for Disease Control's Behavioral Risk Factor Surveillance System (BRFSS). These data provide information on the number of cigarettes smoked per day for people that report being smokers. The BRFSS is a very large dataset and is meant to provide a comprehensive look at the risky behaviors of individuals in the United States. The data are collected from a random sample of adults (age 18 and over) annually. More details on the BRFSS can be found in CDC (2003).
Summary statistics for the variables used in our analysis from all the sources are presented in Table 1. There is an increase between 1990 and 2000 in the tax rate and real price of cigarettes, as well as a huge increase in the share of people using the Internet. A major cause of the increase in prices came about from the tobacco settlement which put in place regulatory charges that are essentially like per pack taxes but are counted in the pre-tax price of the cigarettes. It is also worth noting that there is cross-sectional variation in the tax rate as well as across time variation. Across time, the standard deviation in the real tax rate for the mean state is 4.7 cents. Across states, the standard deviation for the mean year is 8.5 cents. For the Internet, however, most of the variation comes across time. Across states within a year, as seen in the table, the variation in Internet usage is much tighter.
We first seek to investigate whether the level and tax responsiveness of a state’s taxed cigarette sales are related to the extent of Internet use in that state (denoted with a subscript s below) in a given year (denoted with a subscript t). We regress the logarithm of per-capita taxed cigarette packs against the log of the real tax-inclusive price of cigarettes in the state and a measure of neighboring states’ tax-inclusive prices. Then, we add the state’s log tax-inclusive price interacted with a measure of Internet usage, and the level of Internet usage by itself. The basic specification is
(1)
where q is the quantity of taxed cigarette packs sold per capita in a given state and year, P is the pre-tax price, tax is the state tax rate (excise plus sales), I is a measure of Internet usage in the state (discussed below), and Y is real personal income per capita in the state. The neighboring states’ are simple averages of all contiguous states’ values. Because we do not expect to be able to explain all of the cross-state and cross-time variation in taxed sales due to non-tax factors, we also include dummy variables for each state and each year. With both state and year dummy variables included, we are seeking to explain the year-to-year changes in a state’s per capita taxed sales relative to the average year-to-year changes, as a function of the state’s year-to-year changes in the real retail price including the state excise tax. In particular we seek evidence as to whether the tax sensitivity has increased most in states where Internet usage has grown the fastest. We will also present results where we allow the baseline price elasticity to vary across states or across time.
2. Data
Although we do not have any direct measures of how much people use the Internet to make or research online cigarette purchases, we will use information about the share of people in a state that use the Internet as a proxy, implicitly assuming that use of Internet cigarette sites is proportional to other measures of Internet use. Our primary data source will be the computer supplements to the Current Population Survey that ask about computer usage in 1994, 1997, 1998, 2000, and 2001. The survey question we use is whether the respondent uses the Internet. Unfortunately, the CPS wording changes from year to year. The 2001 estimates, for example, report Internet use from any location, whereas in the 2000 and 1998, they report Internet use at home and outside the home separately and in 1997 home, work, and school separately. For 1997, 1998, and 2000 we define an individual as an Internet user if they respond yes to any of these questions. The 1994 version of the survey does not contain any questions related to the Internet, but did ask whether they had a computer with a modem. This was repeated in 1997 so we multiply the share of modem users in 1994 by the share of modem users in 1997 that had Internet access (58 percent).
We will also use data from a large consumer survey conducted by Forrester Research, Inc. as part of the Technographics 2002 program. The survey asked some 80,000 people about their demographics (including whether they smoke) along with questions about whether they use the Internet at all, whether they have ever bought something online, and their past history of Internet usage. The data is meant to be nationally representative; more details can be found in Yonish et al. (2001) or Goolsbee (2000). Using the data on how long each person has been online, we are able to create a measure of the share of each state’s population that was online in a given year from 1995 to the present following the method of Goolsbee and Brown (2002). For years before 1995, we set all the Internet use measures to zero. We will use the share of the state population that had online access in the year as our measure. The survey data would also allow us to compute alternative measures such as share of people in the state that have bought something online, the share that smoke and have Internet access, the share that smoke and have bought online, and the share of smokers in the state that are online. Varying the measure of Internet access, though, made little difference to the results so we have left these alternative measures out to save space.
The data on taxed cigarette sales, excise taxes, and the retail prices of cigarettes span 1980 to 2001, and are taken from The Tax Burden on Tobacco, published by The Tobacco Institute until 1998 and updated by Orzechowski and Walker (2001). The tax rate is the weighted average over the fiscal year. Since the price is only reported at a point in time (November 1 of the year) we impute an estimate for the weighted average price over the fiscal year, although our results were very similar just using the point-in-time measure instead. Because of our concern that the pre-tax price might be endogenous to the state excise tax rate, we use the tax rate alone as an instrument for the tax-inclusive price, p+t.
When we examine the actual consumption of cigarettes in the states in response to tax changes, we analyze data for 1990 to 2000 from the Center for Disease Control's Behavioral Risk Factor Surveillance System (BRFSS). These data provide information on the number of cigarettes smoked per day for people that report being smokers. The BRFSS is a very large dataset and is meant to provide a comprehensive look at the risky behaviors of individuals in the United States. The data are collected from a random sample of adults (age 18 and over) annually. More details on the BRFSS can be found in CDC (2003).
Summary statistics for the variables used in our analysis from all the sources are presented in Table 1. There is an increase between 1990 and 2000 in the tax rate and real price of cigarettes, as well as a huge increase in the share of people using the Internet. A major cause of the increase in prices came about from the tobacco settlement which put in place regulatory charges that are essentially like per pack taxes but are counted in the pre-tax price of the cigarettes. It is also worth noting that there is cross-sectional variation in the tax rate as well as across time variation. Across time, the standard deviation in the real tax rate for the mean state is 4.7 cents. Across states, the standard deviation for the mean year is 8.5 cents. For the Internet, however, most of the variation comes across time. Across states within a year, as seen in the table, the variation in Internet usage is much tighter.
