Skip to main content Skip to navigation

Horizontal and Vertical Indirect Tax Competition: Theory and Some Evidence from the USA

Micheal Devereux, Ben Lockwood and Michela Redoano

CSGR Working Paper No. 147/04

October 2004




This paper provides a simple theoretical framework for analyzing simultaneous
vertical and horizontal competition in excise taxes, and estimates equations informed
by the theory on a panel of US state and federal excise taxes on cigarettes
and gasoline. We also examine the role played by smuggling. The results are generally
consistent with the theory, when the characteristics of the markets for the
goods are taken into account. For neither good do federal excise taxes affect state
taxes. Taxes in neighboring states have a significant and large effect in the case
of cigarettes, and a much weaker effect in the case of gasoline. we also find that
in the setting of cigarette taxes, concerns about cross-border shopping play a more
important role than concerns about smuggling.


Keywords: tax competition, excise taxes, cross-border shopping, smuggling


JEL Classification Numbers: H70,H71,H77