Cigarette excise taxes have increased sharply at both the state and federal level and the tax differential across states is larger than ever. Furthermore, new sources of low/untaxed cigarettes available from the Internet and Indian Reservations have become much more prevalent in recent years. Few previous econometric studies of cigarette prices and smoking behavior have been able to examine the impact of these less expensive sources of cigarettes on smoking prevalence or cessation because of the recent nature of this phenomenon and their reliance on large aggregate-level data rather than on individual smoking behavior and purchase patterns tracked longitudinally. A small but growing body of evidence suggests (but is not conclusive) that smokers do alter their purchase patterns when faced with price increases by switching to discount/generic cigarettes and by seeking out low/untaxed cigarette sources from other states, Indian Reservations, or the Internet. This limited pool of literature also suggests that smokers who make efforts to purchase less expensive cigarettes are less likely to quit in the future. The bottom line is that when cigarette prices go up, smokers adapt by changing their purchase patterns. These changing purchase patterns threaten to undermine the public health benefit of higher prices because they give price-sensitive smokers who may have quit otherwise an option to keep smoking. This weakens the effect higher prices have on cessation and also results in uncollected tax revenue for state governments.

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